As all athletes know, core fitness is a major key to success. It improves strength, balance, endurance, and stability, allowing competitors to realize their full potential and reduce the risk of injuries. Similarly, companies that keep their core business in top condition not only enjoy greater fiscal stability and strength today, but are also better positioned to invest for the future. For many companies, peak condition in the core is sustained through digital fitness—an ability to invest in and innovate using digital technologies.
However, Accenture research has found that many companies are not actively building their digital muscles, even when the company is in a strong financial position. When we examined the financial and digital performance of more than 300 global companies, we found one category of businesses that was surprisingly strong on financial performance, especially profitability, but comparatively weak on digital performance (as measured by a company’s commitment to, and investment in, digital capabilities). We call this group, 16 per cent of our studied group, Business Leaders.
This is the second in a series of articles about making digital investments to improve financial performance. In the first article, “Boldly Going Digital”, the authors examined how companies can get the most out of digital investments.
Strong, sustained profitability of the kind enjoyed by Business Leaders is the dream of many companies. But it can lull a company into a false sense of security. In comparison, the group we call Digital High Performers—companies that successfully convert digital investments into financial benefits—also deliver high returns to shareholders, but as well, they project confidence in their future growth.
Although both groups of companies have grown their overall Enterprise Value (Market Value of Equity + Net Debt) at a similar pace (8 per cent compound annual growth for Business Leaders, and 7 per cent for Digital High Performers, between 2006 and 2016), they pose very different investment propositions. We examined Total Shareholder Return (TSR), which represents the rate of return for investors (Dividends plus Share Price Growth), and found that the Digital High Performers have significantly outperformed Business Leaders. A US$100 investment in a Digital High Performer company in 2006 would be worth US$460 in 2016; a Business Leader company would be worth US$296 (see Figure 1).
The Digital High Performers demonstrate that a strong strategic vision and greater appetite to invest in digital technologies can enable companies to break away from the competition. Notably, Digital High Performers set the standard for how to allocate digital investments in a way that enables a business to gain tangible results, both in profitability and revenue growth.
Figure 1: Total Shareholder Return Trends—Business Leaders’ versus Digital High Performers’ Dividend Adjusted Share Price, 2006–2016 (indexed starting with 2006 at 100)
Source: Accenture analysis of financial data from S&P Capital IQ, accessed August 2017.
In short, Business Leaders of today enjoy financial fitness that appears robust on the surface, but without a greater focus on digital fitness, their future success is at risk. (For a detailed look at how we define and measure financial and digital performance, see About the Research.)
DIGITAL FITNESS: PRESSURE POINTS
Business Leaders have maintained financial strength thanks to their legacy business but, if not renewed over time, the strong legacy of today can become a challenge tomorrow. Accenture’s Digital Performance Index, which assesses companies’ digital investment and progress, shows that Business Leaders underperform on all four broad company activities (see Figure 2).
Figure 2: Digital Performance Index Score, Business Leaders versus Digital High Performers
Source: Accenture analysis.
When all four categories are combined, the index score for Business Leaders is 44 per cent lower than that of the fitter Digital High Performers. More importantly, our research found that several key pressure points block Business Leaders’ progress toward stronger digital fitness on these four dimensions:
Plan: Digital strategy planning and execution. When it comes to dedicating budgetary resources and establishing clear performance indicators for digital strategy, Business Leaders’ Digital Performance Index score is 47 per cent lower than that of Digital High Performers. Progress is blocked by the absence of a clear digital agenda embedded by design in Business Leaders’ strategic and financial plans.
Make: Digital production and delivery. Business Leaders also lag in the way they use digital capabilities to design products and services and streamline operations—by a gap of 46 per cent relative to Digital High Performers. Progress is blocked by the failure of Business Leaders to leverage digital technologies to experiment with innovations in product development.
Sell: Digital customer experience management. Business Leaders are not using digital proficiently in engaging, selling to, or serving customers—by a gap of over 30 per cent relative to Digital High Performers. Progress is blocked by a lack of customer insight that is consistently used to understand and meet new needs shaped by technology.
Manage: Digital corporate culture and operations. The most significant indicator that Business Leaders are lagging behind Digital High Performers (by 61 per cent) is their failure to assess and renew their organization. This is evident in the weak appetite for adopting a “fail fast” culture, uplifting workforce digital literacy and skills, and establishing a dedicated digital business unit that is free from the constraints of established silos. Progress is blocked by an inability to accelerate modernization of their core business.
GETTING FIT TO LEAD TOMORROW
For world-class athletes, the pursuit of success begins well before head-to-head competition; it begins with training. Athletes master the art of “deliberate practice,” which requires motivation, support from partners, and persistence.
Business Leaders also need to practice deliberately, learning how to invest in their evolving business model while also preparing the organization for modernization from the inside. This is what we define as “rotation to the new”—a deliberate approach to change that will dramatically upend the corporate structure, culture, and ways of operating.
What are the deliberate moves that Business Leaders need to master?
1. Get motivated to excel at serial investments.
Staying unflinchingly motivated is critical to physical fitness. It’s not easy for most people to get off the couch and put in the effort, day after day, week after week. But world-class athletes do it; so do world-class companies.
The path to future leadership begins with sound investment strategy. Investment capacity for many Business Leaders will not be a challenge; the higher hurdle is often achieving the motivation to invest deliberately.
Successful companies are making targeted, serial investments, rather than monumental acquisitions. For instance, according to The Economist, Spanish banking giant Banco Bilbao Vizcaya Argentaria (BBVA) has invested nearly US$200 million in digital-only banks, such as Atom and Simple. The bank is also changing its investment approach to fin-tech start-ups. In February 2016, the bank announced that it had spun off its US$100 million venture arm into a separate corporation, Propel Venture Partners, a US$250 million fund. BBVA will be a limited partner in Propel, a fin-tech venture capital firm that will focus on payments, credit, insurance, wealth management, e-commerce, security, and compliance.
In 2014, Salesforce announced the launch of its first dedicated venture capital fund, Salesforce1 Fund. The entire fund is committed to activities related to cloud technology. Salesforce further set aside US$100 million to invest in the European market to capitalize on technology firms rising outside the United States and Asia. Since its establishment, ten investments have become valued at more than US$1 billion, according to CB Insights, making Salesforce one of the biggest “unicorn hunters” outside financial services.
2. Renew the business model, but not alone.
Even athletes in individual sports often train with a partner. It ratchets up the motivation and can lead to better results. This is also true for today’s Business Leaders.
Developing new digital offerings and focusing on intangible assets is key to moving Business Leaders toward higher digital performance. Inherent legacy strengths provide a foundation; these include the customer base, brand equity, and expertise with managing complexity. While many Business Leaders are already focusing on renewing some parts of their business model, the challenge is to successfully expand beyond the existing industry boundaries and partner pragmatically.
For example, Ping An Insurance, the first integrated financial services conglomerate in China, launched a unicorn company in its Internet sector portfolio. Its online-to-offline healthcare-servicing platform, Good Doctor, serves 27 million monthly users, who collectively receive up to 400,000 diagnoses per day. The company attained its industry record-breaking valuation of US$3 billion in 2016, one year after it was founded. This move launched Ping An into a new market that is worth an estimated US$150 billion, setting the tone as a serious competitor against digital natives such as Alibaba.
Philips Healthcare, a medical equipment maker, is placing a big strategic technology bet on a platform business model by launching the Philips HealthSuite with three cloud partners: Salesforce.com, Amazon’s AWS IoT, and Alibaba Cloud. Philips expects to be able to rapidly scale up HealthSuite to provide services to hundreds of millions of patients.
3. “Do the reps” to encourage cultural disruption.
Repetition helps build strength, endurance, and flexibility.
Business Leaders aspiring to stronger digital performance should embrace innovation as a mechanism for driving cultural change. Many companies focus on introducing innovation programs, but drawing upon innovation repeatedly is a cultural challenge that requires undivided attention.
For example, Progressive, one of the largest U.S. auto insurance providers, has established Business Innovation Garage (BIG), an internal think-tank and virtual testing environment for innovative products and services. BIG has a physical location and is staffed virtually with “mechanics,” teams of analysts, and IT developers working for a “garage manager,” with the objective of exploring and testing new ideas, and learning how to fail fast—and thus innovate faster. BIG has enabled Progressive to get products to market faster in one of the most regulated industries.
Amazon has been disciplined and relentless in its approach to innovation by de-romanticizing it. As Forbes pointed out years ago, innovation at the company has long been part of the everyday, for everyone. Before being offered a job at Amazon, all prospective employees are asked to describe something they invented. Responsibility for coming up with new products or services is not centralized. (There is purposefully no chief innovation officer.) This focus on normalizing innovation and using it pervasively throughout the organization is part of what has made Amazon such a successful company.
Like athletes at their peak who fail to train hard enough in the off-season, Business Leaders may underestimate the impact that nimbler and more technology-savvy competitors can have on their current financial lead position. To get fit to lead in the future, these companies must stay on top of their game with a tireless focus on investment, business model renewal, and a persistent culture of innovation. Like out-of-shape athletes, companies that fail to focus on building digital fitness today risk becoming also-rans in the future.
ABOUT THE RESEARCH
Accenture studied 343 leading global companies across eight industries, using a Digital Performance Index to evaluate companies’ digital investment and progress across 117 detailed metrics. The results showed that 60 per cent of the companies survived in the past without building up digital capabilities. In contrast, only 6 per cent of companies managed to translate digital investments into sustained financial gains. We identified these as Digital High Performers. Interestingly, Business Leaders, 16 per cent of the total sample, managed to maintain financial strength without prioritizing digital capabilities (see Figure 3).
Figure 3: Digital versus Financial Performance
Source: Omar Abbosh and Paul Nunes, Achieving Digital Performance: Time to Rotate to the New (Accenture, 2016), 3.