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One in Four Companies Is at Risk of Missing the Boat on Digitization

The FINANCIAL by The FINANCIAL
August 3, 2017
in Tech
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One in Four Companies Is at Risk of Missing the Boat on Digitization
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The FINANCIAL — Among companies in Europe and the United States, the gap between digital top performers and laggards is wide, according to “Beyond the Hype: The Real Champions of Building the Digital Future,” an article by The Boston Consulting Group (BCG), for which some 1,300 companies estimated their level of digital maturity. While the top performers achieve a high level of digital performance, around one in four companies is at risk of missing the boat.

“Digitization is creating a deep divide in the corporate landscape worldwide. Companies that fail to keep up could lose a lot of their significance in the future,” says Massimo Russo, a BCG senior partner and a technology expert. “While the digital champions can be found particularly among telecommunications and technology companies, other industries are finding the transition to software solutions and services more difficult. They often develop and market digital products and services that don’t appeal to target customers, who often differ from their traditional clients.”

The study’s foundation is BCG’s Digital Acceleration Index (DAI), which is based on companies’ self-assessment of their level of digital maturity in 27 digital dimensions. Companies with a DAI score of 67–100 DAI points are ranked as top performers, while those with a DAI score of 43 or less are considered laggards.

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The United States Has More Top Performers Than Europe

According to the survey, the US has 20% more digital top performers than Europe, putting the US market on a faster track toward digital transformation. Overall, 28% of US companies were digital champions and 23% were laggards. In Europe, 23% were champions and 25% were laggards.

The US top performers excel at reinventing or disrupting their own business models (90 DAI points compared with 84 DAI points in Europe), using analytics (for example, collecting machine data in the agriculture industry in order to optimize harvests), and reinventing the customer experience. US companies are also further along than their European counterparts in creating digital acceleration centers to coherently drive innovation (85 DAI points compared with 80), and in extracting financial gains from digital (78 DAI points compared with 72). “Ambitious goals, combined with a clear implementation timeline, are crucial for digitization. The more confident companies are in their abilities when it comes to digitization, the greater their progress toward competitiveness and future readiness,” says Bharat Khandelwal, a BCG partner and an expert on technology and digital transformation.

Telcos Enjoy the Greatest Digital Success

As a result of the analysis, the authors concluded that a company’s digital development is more industry specific than country specific, driven by similar starting points and a similar affinity for digitization. Not surprisingly, the telco and technology industries are the most advanced. Among US telcos, 41% are digital champions with their own digital offerings (such as Internet of Things applications) and digital customer journeys, whereas only 30% of European telcos are digital champions. For years, companies in these industries have been using experienced software developers to develop digital products and services and interacting with customers through digital channels. Other industries have yet to learn many of the digital tactics that tech companies and telcos have been deploying and that have become integral to their value creation.

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By their own estimates, companies that manufacture mechanical and electrical equipment in the US and Europe have the largest shares of laggards (US 31%, Europe 33%). “Many mechanical manufacturing firms are currently facing the decision of whether to primarily sell machines or to additionally offer their customers services in the fields of data analysis, artificial intelligence, and robotics. To do so, they will initially have to invest more, especially in their software and IT capabilities and in the digitization of their processes,” says Russo. (For more on the challenges of switching to digital, please see BCG’s article “How Hardware Makers Can Win in the Software World.”)

What Top Performers Do Differently

The study identified three factors that companies in the group of digital top performers have in common.

They invest. Over half of the top performers have a digital investment volume of at least 5% of operating expenses.

They recruit digital experts. Around half of the top performers have increased their share of digital jobs to more than 10%.

They live in a digital culture. Top performers say that their digital organization is already very well advanced and firmly embedded within the company.

Digital top performers benefit from the fact that the management board drives the digital agenda: “Digitization is a management issue. The digital transformation can succeed only if the management board sets ambitious targets and manages them through a transformation office. It is also critical to have a unit responsible for new digital products and to work more intensively with agile methods throughout the organization. Top performers also avoid piloting pure technical gimmicks and use process digitization to improve their performance,” explains Russo.

The top performers state that they want to primarily expand their digitized production and set up their IT more efficiently by 2020. As Khandelwal notes, “With the onset of digitization, many companies built up a veritable IT jungle. Those that are now in a position of strength should use it to free themselves of the legacy issues in their IT architecture.” 

Many laggards indicate that they want to focus on digitizing their processes and optimizing their IT landscape in the coming years. At the same time, they want to expand their digital customer communication and use of customer data. “Expanding the digital customer interface and using it to collect data is an important step for digital laggards. Only then will they be able to sustainably generate revenue in the future and increase their scope for investment,” says Khandelwal.

 

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