Will your digital investment strategy go from virtual to reality?

Digital leaders have a strategic advantage

In addition to accelerating new digital products, services and business models, digital leaders are much more likely to:

• Have a clearly defined strategy for digital (48%, vs. 36% of others)
• Reprioritize their digital initiatives to focus on those with immediate cash returns, while discontinuing unnecessary initiatives
• Dedicate funds saved to accelerate new digital products, services and business models
• Invest in the right emerging technology to execute on that strategy (53% vs. 45%)

That technology mix is more likely than others to include investments in internet of things (IoT), cloud computing and advanced cyber defense — showing that digital leaders are creating a strong foundation (through cloud and cybersecurity) to rapidly accelerate emerging technology solutions (such as AI/IoT).

To meet their strategic goals, nearly three-quarters of executives say they are shifting to M&A and partnerships to accelerate digital initiatives (see Fig. 1) — on average, digital leaders are shifting approximately five percentage points of their investment mix from building internally to M&A. That shift is important, as the EY survey shows that these investment vehicles are more likely to perform above expectations (see Chapter 3).

For now, digital leaders are an elite group. What digital leader traits can other companies adopt as they chart a path forward?

Futureproofing technology investments 

Nearly two-thirds (62%) of executives agree that organizations must radically transform their operations over the next two years. To do that, executives are starting to turn to emerging technologies. Fig. 2 shows that IoT, AI and cloud computing have become table stakes. Executives also predict large jumps in investments in automation, and digital collaboration tools. While these investment plans are not on par with those of digital leaders, the gap is closing.

Shifting to digital M&A and partnerships 

This survey shows that executives know which technologies they need to succeed in a digital future. But there is misalignment when it comes to the investment vehicles they use.

Additional data analysis from CB Insights shows that building internal capabilities, using patents filed as a proxy, is critical in driving value as reflected in the median share price return segments in Fig. 3, below. However, the optimal approach is found in pursuing a balance of both organic (patent) and inorganic (M&A and CVC) strategies to capture both value and speed. 

While balancing the development of in-house capabilities as well as M&A, CVC and partnership investments, survey respondents are more likely to say digital M&A exceeded expectations (52%) than any other investment vehicle. (Partnerships come in second place, with 45% saying they exceeded expectations.)

Executives need to be aligned on investment strategy

Digital M&A may be more likely to exceed expectations for some, but the risk of failure is high. A lack of executive alignment or collaboration may doom digital M&A initiatives from the start. Executives who report that digital M&A investments met or were below expectations cite misaligned sources of value as the top reason (64%).

That misalignment is concerning. With more than half of executives planning to use digital M&A or partnerships to accelerate digital initiatives, it is essential to make sure the goals and values of an organization and those of acquired or partner firms are coordinated. Internal alignment is also challenging — just 43% of executives agree that digital leaders from functional groups are fully aligned on their organization’s digital M&A strategy.

Alignment and collaboration pay off. Executives who reported that partnerships and digital M&A met or exceeded expectations were significantly more likely to say that they were implemented by multiple executives (e.g., a combination of CFO, CIO and others).

In order to create an investment strategy that meets goals across the organization and adds value, executives need to be aligned on the mix of investment vehicles used by the organization — and continue that collaboration when it comes to taking ownership and directing those investments. Breaking down organizational silos and playing to executives’ individual strengths (e.g., relying on chief digital officers to develop in-house capabilities, while tapping CEOs to lead on M&A) are the best ways to develop a successful investment strategy.

Lack of skills and budget stalls digital programs 

Organizations without a clearly defined digital strategy are putting themselves at risk. But even the most flexible and technology-enabled strategies can be hamstrung by other issues. Fig. 4 shows that a lack of skills (65%) and budget (59%) are the top barriers to digital programs, with a lack of operating model not far behind (45%).  These barriers help explain why less than 10% of all respondents — including digital leaders — say they are currently realizing the full benefits of their digital efforts.

In our experience, these top barriers to scale can be mitigated in a number of ways:

1. Lack of funding: Insufficient capital can hinder the ability to grow from pilot project to scale. Proper due diligence, a clear business case and an understanding of internal competition for resources is essential prior to initiating new digital initiatives and investing significant resources.
   
   
2. Unsuitable operating model: Companies must examine whether they have the right operating model in place prior to initiating new digital initiatives. The operating model must be agile and align to both the business and the IT structure currently in place.
   
   
3. Scarcity of talent resources: Competition for tech talent and data scientists continues even during the recent pandemic. Larger, traditional companies can’t always compete against an exciting start-up with an innovative environment. Companies should properly articulate the type of talent that they need and look at alternative sources such as partnerships and acquisitions.
   
   

Skill at scale

To effectively scale digital investments, the organization needs to be empowered with the right skills. Fig. 5 shows that the digital leader group is more likely to focus on hiring new employees to boost their digital skill sets, while non-leaders are more likely to be reskilling existing employees or outsourcing.

To overcome key barriers to realizing value, companies will require highly skilled employees and an effective, flexible digital operating model. Yet only half of executives say their operating model meets their goals. Operating model issues, combined with skills and strategy shortages, explain why many organizations are struggling to scale their digital initiatives.

Though the barriers are similar for new business development and core process digitization, the best ways to remove those barriers differ. For example, operating model issues for a new, digital business may be better solved through a structured approach that can include creating clearly defined milestones, bringing in new native digital talent and clearly defining outcomes. On the other hand, digitizing the core may center around agile, cross-functional teams. Regardless of the objective, companies must be able to experiment and discontinue initiatives that are not working.

Return on digital investment: The RODI advantage 

In a cash-constrained environment, proving the value of all investments — including digital — takes on an increased importance. While more than three-quarters of executives say that digital initiatives have been critical to their organization’s success over the past two years, putting firm numbers on this success remains a work in progress.

Less than a quarter of executives say they actively measure RODI, though other KPIs are more common, including KPIs about financial performance (57%) and operational efficiency (46%).

Although the ultimate goal is to measure financial return on investment, in early stages of a digital investment there might be other operational KPIs to measure such as user adoption, customer retention or user feedback.

Among the sectors represented in this survey, technology, media and telecom; (TMT), financial services; and advanced manufacturing and mobility (AM&M) are the most likely to use KPIs in general, and around one-third of them use RODI as a measurement (see Fig. 6).

Tech, media, telco and entertainment, financial services and advanced manufacturing and mobility lead the pack on measuring RODI. Companies that use RODI as a metric were 50%+ more likely to achieve 5%+ RODI in 2019. This suggests that wide use of KPIs, including RODI, may result in higher returns, perhaps because these organizations are more in tune with the performance of their digital investments and operations.

Overcoming barriers to accurate RODI measurement

Measuring RODI is not always easy. More than half of executives say a lack of clearly defined strategy and goals is a top barrier to measuring RODI. Companies must have an effective governance model in place to quantify success, focusing on results and scale.

Skills and data gaps often prevent companies from measuring the success of digital initiatives. Executives must work to obtain talented employees (through new hires or reskilling), while breaking down intracompany barriers to data sharing so they can correctly measure their RODI and meet strategic goals.

Conclusion

It is clear from these survey results that executives have work to do to improve their digital investments — and to accurately measure that payoff. We recommend the following actions:

1. Determine a clear strategy that details digital spend, technology requirements and a coherent path to execute. Few survey respondents say they have a clearly defined strategy, and even fewer say those strategies are flexible. Both are necessary to weather disruptions and succeed in the future. 
   
   
2. Identify sources of funding early in the process and create the right interventions to ensure proper usage of funds.
   
   
3. Align executives on the right investment mix of “build, partner, buy, corporate venture,” and develop an integrated approach to accelerate digital initiatives and achieve strategic goals. Depending on the digital initiative, tech requirements and internal capabilities, “build, buy, partner” may lead to different RODI and speed of implementation.
   
   
4. Revisit your operating model to ensure agility and that it can accommodate key external constituents for talent (e.g., ability to bring in and leverage strengths of external entities including tech partners, start-ups and universities.)
   
   
5. Consider digital M&A as a means to further accelerate post-pandemic digital performance, and use partnerships to close funding gaps.
   
   
6. Focus on hiring and retaining top talent, securing access to funding and improving operating models, while learning from the digital leaders to achieve the full benefits of digital investments.
   
   
7. Establish a strong governance model and KPIs to manage digital initiatives in order to accurately measure RODI, identify potential weaknesses in digital strategy, learn and adjust.
   
   
8. Rebalance your portfolio of initiatives during the pandemic. For example, cash-generating initiatives should be prioritized in the short term to fund future growth through new digital products and services.

Andy Youn, Robert Lin, Andy Robertson, Jierui Liu, Corinne Daniel and Imran Venjara of EY-Parthenon were primary contributors for this work.