The Digital Technology Bets of Leaders

Research from Cognizant Digital Business called The End of the Beginning offers an intriguing view into how fast companies are traveling on their digital journeys and where along the way they have won the payoffs to fund their next waves of profitable growth.

Surveyed were some 2,500 business and technology leaders across a dozen industries globally. Added together, their businesses accounted for $21.6 trillion in annual revenues. The sample was balanced between North America, Europe, and Asia Pacific/Middle East. You can find more about the research here.

Company, Disrupted

In what has been dubbed a “march to the middle” between old economy and new economy players, challengers are adding in-person customer service, retail outlets and traditional operations while incumbents have launched easy to use apps and innovative digital products. The result is a blurring of the dichotomy between digital natives and classic companies to the extent that they compete for the same customers and talent with increasingly similar value propositions and mindsets.

It’s not just big techs like Apple, Amazon and Google entering new areas like consumer payments. Or just upstarts challenging established businesses built over decades or even centuries. It’s old-line competitors self-disrupting their own business models and cultures with internal digital transformation initiatives and partnering with others outside their category to offer new products and possibilities.

Perhaps the biggest fear: When traditional competitors combine with fintechs, for example, or become part of a new bank-merchant payment ecosystem for first mover advantage. Always figuring into the equation are the constants of brand, trust, data, product pricing and features, and retail presence. But what we define as a payment product and who we get it from has changed forever. As consumers, now we can choose from a variety of providers including Chime, Simple, Apple Pay Cash, Starbucks, WeChat, T-Mobile, Venmo via PayPal, and new products from established banks enabled by partners or on their own.

So, what’s new? We’ve been talking about disruption for years. But lately there are warning signs that time is running out to make the leap. Now that everyone is in the same race, Wall Street and venture capital funds have started to apply the same rules. All companies must show revenue, profits and a cash positive horizon. This includes digital growth wonders the likes of WeWork and Uber as seen in their post-IPO valuations.

Make Your Move Before It’s Too Late

We have progressed so far into digital transformation that it almost isn’t a thing to distinguish anymore; it’s everywhere. The Gartner hype cycle describes initial skepticism about innovation that leads to unrealistic expectations followed by a backlash of disillusionment and then a boost of enlightenment. And today’s current cycle started with digital-driven innovation 20 years ago.

While some have termed this new normal the Post Digital Era – we are, more precisely, entering the End of the Beginning of this period. In it, many companies show signs of having put the hard work of laying their digital foundations behind them. Others state that their companies will go out of business in the next 3-5 years if they can’t successfully transform.

Cognizant’s digital maturity research grouped companies into Beginners, Implementers, Advancers and Leaders. This was done based on their stage of development, percent of digital revenues, and benefits from transformation. One stand-out fact: Within three years, the majority of companies in the midst of their digital transformation journeys (that is, all except Beginners) will be nearing completion or substantially on their way in all of the top 13 areas of digital transformation. We’ll explore these technology and organizational advances more below.

The gap that earlier phase companies need to close could soon become a chasm. On average, companies that are maturing or advancing already currently have a three-year head start on the beginners. This gap is seen in far ranging areas from modernizing core IT, aligning operations and automation/RPA to digital strategy, innovation culture and workforce transformation. These technology investments help with both cost and revenue to deliver bottom line advantage.

And the gap is widening as the leaders of the pack pick up the pace. By 2022, when today’s Beginners will have caught up with where the more mature were in 2019, then those Leaders already will be moving 20% faster than the Beginners. Not only are the maturing or advancing companies farther out in front but they are progressing even faster. Under the pressure of growth expectations, more experienced companies are pushing themselves even harder to make quicker and bolder moves over the next few years.

Once they move out ahead of the pack, digital advanced companies have the means to hold onto their lead. Leaders report higher (mean net) profits than any other cohort with margins of 7.2%. Implementers and Advancers, with margins of 6.1% and 6.2% respectively, have to tighten their belts while they catch up and before attaining the full cost and revenue benefits of being digital. Beginners, at 6.6% on the other hand, must wean off delivering higher profitability in the short term so that they can sustain the investments in advanced technology required to run their digital marathons.

The Best Technologies: Where to Catch Your Next Growth Wave

Depending on where you are on your digital maturity journey, certain investments will make more sense at certain times. Looking at advanced and maturing companies, you can see patterns in the technologies that payoff most and in turn enable next generation advances.

The more mature technologies have been targeted for the earliest investments and are winning the highest returns. Over 70% of companies have already generated moderate to high returns in cloud, mobile technology and cybersecurity, making these the lowest risk yet most urgent areas to address.

Having these prerequisites for future success in hand, leaders have moved on to the battlegrounds of process automation (RPA), data management, analytics, artificial intelligence (AI), and software deployment. One of the biggest payoffs is data and analytics, with two-thirds of respondents say they’re getting a moderate or high return on investment in this area, delivering crucial revenue growth and cost savings. Of particular concern: the three top areas having the largest positive impact in revenue over the last couple of years are automation, AI, data management. Yet these are the areas where the difference between leaders and beginners is biggest.

Anticipating that the current batch of technologies will become tomorrow’s table stakes, leaders have embarked on proofs of concept, scenario planning and in some cases starting to scale next wave technologies including blockchain, virtual reality, drones, nanotechnology, geospatial and quantum computing. Combining these with existing areas will provide a future competitive edge. 

“Overall, the inexorable shift from simple digitization in the Third Industrial Revolution to innovation based on combinations of technologies in the Fourth Industrial Revolution is forcing companies to reexamine the way they do business.”

Klaus Schwab, founder of the World Economic Forum, noted this phenomenon in early 2016. He saw the structure of “the many technologies that surround us and which have become part of us” as having been largely set by companies, policy-makers and entrepreneurs within 10 years. Here's more if you want to read the full article.

Executives acknowledge that to truly transform their businesses they must unify multiple technologies – such as Internet of Things, data, machine learning, cloud and cybersecurity – which is time consuming and tricky. Adding to the complexity, bootstrap economics are at play here. Executing on first wave technologies can be a requirement to creating the revenue and savings needed to fund the second wave, while implementing on the second wave will provide the resources needed for the third wave.

How Much to Invest: Benchmark Your Digital Returns

For companies that have made the right digitally-driven investments, the payoffs have been substantial. More importantly, returns on digital investments can fill the coffers to fund the next round in a virtuous cycle of growth.

But how much is enough? Cognizant’s research points to clear benchmarks of digital maturity when it comes to investment thresholds, margin improvement and revenue attainment. The averages noted here serve as a good starting point for more nuanced industry, regional and functional conversations based on the underlying data.

1. Investment levels of 10% Are you investing at least 10% of revenue on new technologies and business models today? Do you have plans to invest a minimum of 16% of revenue in the next three years? These are the average investment levels of surveyed companies.
2. Margin improvement of 2.3% Have you used transformational technologies to boost bottom-line performance by at least 2.3% over the past year? If not, you’re below average based on companies in the Cognizant study.
3. Revenue attainment of 35.6% How much revenue is new technology driving for you? On average, companies got a total of 35.6%. Of that, 14.3% “direct revenue” came from digital channels and 21.3% “influenced revenue” came through marketing, digitally-enabled products and services, etc. Leaders compare at 22% and 30.5%, respectively. Differences were seen by industry and function.

What are the payoffs for companies that have made investments in their digital maturity? Digital leaders have accrued business benefits ranging from operational and strategic to soft. Across the board, leaders are seeing double the results compared to beginners in improved profitability, increased revenue, and decreased costs/greater efficiencies.

Leaders are also realizing strategic benefits such as a wider range of business models/channels; global expansion and ability to scale the business; greater market share, and superior shareholder value. Lastly, they’re also moving up in the eyes of others, with better customer retention and engagement, and an enhanced reputation from using technology to improve people’s lives both listed in the top four benefits.

The study quantifies what is at stake. Net economic impact, which is revenue minus cost, increases at every stage of digital maturity and is cumulative. Beginners have a net benefit of 2.7% of overall revenue, which for the average company revenue of $8.5 billion produces a net impact of $230 million. As a company moves through the stages of digital maturity it unlocks further levels of benefit. Leaders win 9.0% of overall revenue get a net impact of $770 million a year on average.

Focus Here: It’s (Still) About Customer Experience

While technology impact is new and ever changing, one thing remains constant. Success starts, and ends, with a singular focus on the customer. When looking at harnessing the power of emerging technologies in any business, executives consistently point to customer experience as the source from which all other benefits follow.

Interestingly, across industries, the core processes where executives see impact today and in the next three years are disproportionately focused on the customer. From providing products, customer service and onboarding, to self-service and platforms, and eCommerce and direct-to-retail – sector after sector is seeing digital as having significant and increasing impact.

In addition, the human element also separates leaders from beginners. Executives in the study attribute high impact to both revenue and cost in the areas of workforce transformation and human-centric, tech-enabled products and services.

There’s an adage that past performance is no guarantee of future results. Companies whose success was built on doing one thing well must broaden focus beyond the bottom line, adapting quickly to changes in customer preferences and marketplace competitors.

Explore Cognizant’s digital maturity study resources here.