2023 Enterprise Digital Impact Study

Host:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.

Chuck Reynolds:
Welcome to the special edition of our podcast series. Today we're discussing the exciting digital impact study. Coming up, you're going to hear insights from the research, exploring the challenges that businesses face in the ever-evolving digital landscape, what the habits of successful digital leaders are, and what the future holds for enterprise digital transformation. It's a comprehensive analysis that digs deep into sharing thoughts on how you can really take practical steps to future-proof your business. My name's Chuck Reynolds. I'm managing director and partner at L.E.K.'s digital practice, and today I'm joined by Darren Perry and Andy Main. Please, introduce yourselves.

Darren Perry:
Thank you, Chuck. I guess for the audience, I'm Darren Perry. I'm a senior managing director at L.E.K., and the head of our digital service line. And that means I get to work with talented folks like Chuck and our vertical sector teams to help clients achieve success with their digital efforts. And that includes a wide range of things, it could be helping a firm advance its overall digital maturity. It could be launching a disruptive new product or business, or everyone's favorite topic these days, unlocking the power of AI. It's a real pleasure to be with you, Chuck and Andy, today.

Andy Main:
Darren, thanks so much, and Chad, great to be with you today. This is Andy Main, and I'm a digital leader in the industry, and have been really focused on helping companies make the most of digital across their entire enterprise. What I do nowadays is, I help companies in a strategic advisor role, and I'm very pleased to be partnered with L.E.K. in doing so.

Chuck Reynolds:
Great. Thank you very much, and welcome Andy and Darren. Let's start with this. Based upon the digital impact study, nearly 40% of companies have deployed digital to achieve at least one of their business or strategic objectives. It's a fairly low number. When you think about that level of adoption, where are we in digital transformation today? Obviously it's not a new topic, but some companies are at different stages of maturity as part of this journey.

Darren Perry:
Well, that's really the question, isn't it, Chuck? And the study that you mentioned, and what we've learned from hundreds of projects over the years with different clients, has helped shed some light on that topic. The statistic you mentioned, what we found in the recent study of over 1,000 executives that stated less than 40% of companies out there are really employing digital for any given business objectives, so say, enhancing the customer experience or improving operational efficiency, was actually a little shocking to us, when we looked at the data, just given all that we read and all that we experience around us. But if you think about it, really has to do with where we're coming from on digital transformation.

So if you think about the first wave of digital transformation, many, many years ago, leaders really developed basic IT infrastructures and used point solutions to eliminate manual work processes. It was very much what we call an inside the four walls, CIO-driven agenda. From there, digital leaders began to invest in things like e-commerce platforms and other ways to enhance the customer experience, but it was still very much point solution in nature.

I think more recently in a second wave of transformation, we've seen companies begin to collect the large volumes of customer and internal data generated from many of their first digital transformation wave initiatives. And this is when leaders really started to embrace the development of advanced analytics, data management, and automation. And now of course we see firms moving into some very exciting applications related to the internet of things, of course artificial intelligence, and other things. And it will continue to change. And I think that's kind of the point, that digital transformation is really more of a continuous process. It's not a one and done.

I think in terms of where we see things going, what we've, I think, experienced, what we've helped drive, what we've learned from our project work, and certainly what we saw in our recent study, is that there's a real emerging focus on growth and risk management that goes far beyond just operating efficiency, which of course was the core of the very first wave of digital transformation. As an example, in our study, 95% of a group that we classify as digital leaders are using digital to launch or improve products and services, versus about 54% of others. We're talking about real disruption there. We think about how Amazon has revolutionized how a company will use data to personalize a shopping experience, or how John Deere has transformed farming by taking data and using that to offer yield improvement solutions to its customer set.

Given that, it's no surprise that what we see among digital leaders is that 99%, so virtually all, are discussing digital in the boardroom these days, both from a growth opportunity, from a risk mitigation standpoint, et cetera, versus a much smaller portion of non-leader. But as I think about it and we reflect on all that's going around us at the moment, I think this will start to change, given that what we're seeing with things like artificial intelligence. Companies and their boards are being forced to sit up and take notice. So I think you will continue to see a wave towards this new trend, new wave, new revolution, as it relates to digital transformation, with an entirely new focus.

Andy Main:
Darren, that was really well said. And just to pick up on that point that you discussed on companies introducing new products and services, like 95% of leaders are investing there. I think that's really, really fascinating and the study, I think, has illuminated that point very nicely. And I think what's behind that is, there's just so much data nowadays and companies are doing a much better job at coming up with the insights from that data. And the speed of decision-making, I think, has been the fastest it's ever been. And the data and the insights and the tools and the AI tools that allow you to do that is enabling people to make smart decisions about their businesses. And that's resulting in the launch of new offers in the marketplace, business model disruption. And that's really, I think, what's propelling this digital revolution forward to the next stage of its progression. So really, really interesting stuff there.

Chuck Reynolds:
Yeah, thanks Darren and Andy. You guys both talked about a lot of different things that digital leaders are doing. So obviously there's companies that have deployed digital transformation strategies, or attempted to disrupt their business, but maybe haven't been successful. When we look at defining "leader" within the digital transformation space, what are the characteristics of leaders broadly across an organization? What does it take to become a leader, according to what we looked at?

Andy Main:
Yeah, Chuck, great, great question and I thought the report did a good job again, and really highlighting the key points of that. But some of the things for a company to be a digital leader, first and foremost, it's got to be owned by the C-suite, and be a topic of conversation at the board level. And there's maybe three or four things which go into that. So first and foremost, a business has to have a focus on developing the talent to become a digital leader, and to get right behind that talent development. For example, in terms of the future of work, how you keep on sourcing digital talent and training your employees to really take it on. That C-suite leadership also needs to put in place the vision of how digital will help a business gain advantage, and with that, really communicate like crazy to build the confidence and the momentum in the business, to give people the ability to want to go for it, to make these business model ambitions come to life.

A general second point is to have an innovation culture, and this whole notion to succeed as fast as you can by applying digital capabilities to a business, and to really have that end user focus and desired outcomes in mind with those innovations. And the one cool thing about digital is that it really helps inspire business model innovation, and you have that culture of innovation, then businesses tend to bring new things into the market at speed to give them that advantage.

Perhaps a third category is to really have cross-functional collaboration. One thing which we've seen to date in business is that people have tended to work in silos, but with digital you can have a connected enterprise. And you should take full advantage of that by having cross-functional integration, not only as you build digital capability, but as you run your business, and to speed up that power of decision-making, but also to speed up how you deliver service to your customers or how to balance supply chain with the needs in the marketplace, and just generally make your business go a ton faster.

And perhaps a final area from me, and one which I think is really becoming a lot more important nowadays, is to really harness the power of the ecosystem. Digital at its core helps businesses connect in new and interesting ways. And connecting with your ecosystem, I think is a key point to bring in things like partners, capabilities, designers, perhaps academics, associations, basically assets that allow your business to be different. And by harnessing the power of the ecosystem, I believe that digital leaders can really get a start on having a huge advantage to their business over their competitors. So Chuck, that's just some of the things in my mind. And Darren, you might have a few things too to add to the conversation.

Darren Perry:
Yeah Andy, I think those are all great points and things that we see. I think maybe just building on your point about deploying digital comprehensively, and having a cohesive view of digital across different business functions and an integrated view of digital across business functions, we see a few very significant benefits to doing so that leaders are realizing and followers are not. And first, there's a multiplicative benefit, if you will, or a compounding benefit in many ways, of thinking about digital cohesively across functions. So imagine investing in digital to improve demand planning, in a way that actually feeds your production optimization, in a way that actually feeds your customer communication about when a product or service may become available for them. So it's really that end-to-end view that is really creating new value and differentiation in the market, and speaks to the benefit of that cohesiveness.

And then, the other thing that we're seeing is that that comprehensive view is really enhancing a business's ability to deploy advanced digital solutions. Really, imagine artificial intelligence here is a great example, where developing a larger, more complete dataset view across the full business is critical. So I love that point about deploying digital comprehensively across the business. If I were to add maybe two things to the list that you mentioned, one would be where we see leaders investing in digital. And one of the things that we really try to focus in on this study is, where are there differences between leaders and others in terms of what they're investing in, as part of their digital strategies? And one really critical theme that came out in terms of a major gap, in terms of where leaders versus others are investing, is in data.

And if we drill into that, we see leaders making much more significant investments in three areas associated with data. One, the capture storage and handling of very large and complex data sets. Two, their willingness to actually pay for alternative external data sources, to complement what they generate in-house and with their own customers. And three, the analytics to capture the insight out of all of that data. So a couple of things really highlighting this theme of investment and data that separates leaders from others.

And I think the final point that I would make that we've observed for a few years now, and I think it's really been brought into start contrast the last year, with all of the momentum around AI on the back of advancements in generative AI, is that we see digital leaders really looking beyond their businesses specifically, even looking beyond their immediate peer set of competitors for inspirations. One very clear example of that, as part of this study, we asked the executives who completed the study to declare, what's the impact that they see of AI and specifically generative AI on their industry, in the next five to 10 years?

And what we saw was really interesting. Digital leaders clearly see the impact that artificial intelligence is going to have on their industries, and in fact, were four to five times more likely to say that AI would have a critical impact on industry going forward than their peers who wouldn't fall into the digital leader camp. And we really see that as what we call an imagination gap or imagination deficit. So I'd say the other key characteristic of leaders is really looking for inspiration beyond your business and avoiding falling into that trap.

Chuck Reynolds:
Yeah, thanks Darren and Andy. I think that's a really interesting conversation around the imagination deficit, of really, how do you define or figure out where to invest in order to differentiate? Whether that's through incremental data sets, the ecosystem, or any other investment that you might be making. So one of the questions that I think is really top of mind for folks is, how do you measure success? How do you really figure out that you're making progress against these goals, when a lot of it might be foundational or not directly, perhaps, related to the core business operations if it's creating a new business model, or a disruptive kind of product in the market?

Darren Perry:
Yeah, that's a great question, Chuck. I think one of the things that we see as a key hurdle for firms in terms of achieving their digital ambitions is getting the execution right. It's one thing to pick the right technology or invest in the right vendor to get you where you want to go, it's something entirely different to actually execute on the potential that that presents. So in terms of how leaders measure success, I'd say first off, they do measure, they're very keen on measuring success, they have a culture of performance measurement. But beyond that, what they measure is a bit different. And I think what we see there is that leaders tend to focus on probably a smaller set of indicators than others, where their aim is really to try not to be distracted by the noise.

And then, beyond focusing on a smaller set of indicators, the thing that we see leaders absolutely do is focus on metrics, focus on indicators that are very clearly and very directly linked to the specific performance outcomes that they aim to achieve with digital. So take for example, someone investing in customer experience and personalization through some digital means. It may be focused on customer lifetime value or net promoter score, instead of others who might focus on broader indicators like market share or shareholder return, where frankly there are too many elements that factor into those outcomes for you to really be able to tie any success back to the specific digital investment.

So I'd say that's key. And then something else that we've noticed as it relates to how leaders measure success is that they're more ambitious. It's not a case that digital leaders sandbag their goals and then beat their goals by virtue of having sandbagged. In fact, it's quite the opposite. They set much more ambitious targets than their peers, and in fact, they're more likely to achieve or beat those targets. Now, I think that's due to a lot of things, but at least in part I think it's based on this nuanced approach to measurement.

Andy Main:
Yeah, Darren, really great points. And just to add onto that too, when you mentioned about the point about execution and measuring the quality of the execution, and I think one thing that's a very good characteristic of digital leaders is their ability to put in place transformation roadmaps. And what I think is the difference in the digital world with transformation roadmaps is that the ability to deliver capability quickly, perhaps in smaller, more impactful chunks, but all added up over time, give a business total advantage. I think that's also another key part of the measurement, in terms of the speed of which improved capability to a business is deployed to yield that benefit. And for example, the whole customer facing aspect of digital, certainly companies measure the revenue that comes in from digital channel, the margin on that revenue is typically higher, because you don't have that same type of costs compared to a traditional business to go get that revenue.

And so, things like speeding up things like conversion rates, to your point, like getting long-term customer stickiness, I think is a key, key factor. And digital has proven over and over again to deliver greater customer satisfaction. So that stickiness to our brand and wanting to get value for that brand is so much more advantageous in digital, compared to traditional means, that that whole argument and results around customer lifetime value is for real. And more and more businesses should take advantage of that, because it's there for the taking. If you apply the right design and the right business model, and address customers with the right experience, it totally gets these results and makes a huge impact.

Chuck Reynolds:
I think that's really interesting, and what you were both talking about is really how digital solutions are important to advancing objectives or increasing revenue or margin, but fundamentally, technology or data alone doesn't make that happen. There's really a human element to this. There's, we're all humans, we are executing these processes. And so in this thinking about this roadmap and this incrementality of growth, how do we make sure that organizations are including the human element in the pursuit of advancing digital maturity?

Darren Perry:
That's really a critical question, and this is where we see a lot of firms get tripped up. And I think on this point of the human factor, there are really two areas that jump out to me, Chuck. The first one is that leaders really recognize that digital transformation is not just technology, that it's actually an operating model change, which means combination of technology, process, and importantly, people. I think just about all firms that are undertaking a digital transformation get the technology piece, and probably even most get the process piece to a degree, though they may not spend enough time really planning for it. But actually, many overlook the people element and this is where they fall down. So a classic example and something that we're seeing a lot of these days, given a lot of focus being placed on AI and data and analytics, is the data analytics function. Where should it sit? Should it be a central function? Should it sit closer to the customer?

Well, the answer probably depends on a lot of things. What's the vision for the data and analytics capability for the business? What's the underlying capability of the company and its people, and other things? But answering that question before investing heavily in the technology and the full digital transformation is an important key to success. So I'd say that's the first thing in terms of ensuring the human factor, is really understanding the people component to the overall operating model change.

The second area for really ensuring the human element is really about understanding your customer. We saw so many firms during the pandemic invest in digital experiences because they had to. And for a time I think that even worked. However, what we're seeing today is just, many of those firms are just not realizing an ROI, or not seeing that they're capturing incremental customers or driving incremental sales from those investments. And oftentimes we find that the reason is because they never really invested in understanding the customer journey, customer pain points, ways to relieve friction, ways to make a more compelling experience. And I think firms that do that as a core part of the digital strategy development are going to be a step ahead.

Andy Main:
The thing too, just on the human aspect of digital, I talked before about just volumes of data that allows businesses to have better insights about all aspects of their business. And one in particular is, what is it that your customers, your humans that you serve want? And I think that data allows you to look at, how do I address these human needs, ones that I know about, and how do I make my delivery both these needs better through digital capability? But for the unmet needs that people have or even the unknown needs that, if I could only bring something to market that addresses these human needs, will make people's lives a whole lot better.

And I think fundamentally that's one of the key aspects of digital is being able to address human needs and delivering solutions to these needs in interesting ways that have never been done before. That just gives people a lot more satisfaction in the lives they lead, to be relevant in each and every moment, that your brand and your business has relevance, and just generally make people's lives a ton better. And I think we see that across the economy, that practice from the application of digital capability. So I think that's a really important point, just to think through the needs that people have at a human level, and the way that digital can address them.

Chuck Reynolds:
Yeah, and I think you guys are both talking a lot about customer needs and the processes there. It's important to also emphasize the employee experience, and really thinking, how can digital enhance the operations of the organization to deliver against those needs? And I think that's an interesting evolution that we're going to see, is that we need to be thinking about how to optimize those processes and enable employees to be better through an enhanced experience that might be more inwardly.

Andy Main:
Yeah, Chuck, it's a really good point, and as we said before, that digital enables that connectivity. And one of the things that we've done over the years is, in a digital experience, there's all these touchpoints. And if you think about the notion of a round trip, a touchpoint has a round trip into a business and then back to the touchpoint again, to deliver the value of a business to the customer. And that round trip requires the coordination and the collaboration, typically of multiple people in a business in different functions and departments.

And digital enables that workflow connectivity from the people, employees delivering the customer experience, to right into the middle, in the back offices, supply chain, extended supply chain, all back to that customer touchpoint. And digital does that with speed, with accuracy, with predictability. It captures data along the way, it makes you smarter, you learn from it. And I think that's a key point, right? And the person whom, or the team serving that customer, becomes all the more smarter because digital has connected the organization around each and every customer touchpoint, in the notion of that customer experience roundtrip.

Chuck Reynolds:
So Andy, is that really what's coming next? If we look to the future of digital transformation, what are the major themes that is going to be on the near horizon?

Andy Main:
So same, the key theme, and I think it's been a theme for many a year, is that digital, because of its ability to innovate a business... And we've seen different mindsets and technologies be introduced to the market over all these years, digital is still going to future-proof a business, guaranteed. And businesses need to be at the forefront of how they can apply digital enablement and capabilities to ensure their future is a rosy future. And that includes, for sure, deep customer centricity. But we are seeing digital move into enterprise digital transformation conversations and scope, and not only be the customer-facing part of a business. And with enterprise digital transformation, all functions are in play, back to that whole notion of connectivity and collaboration over functions, typically to serve customers in much more improved ways. But also as Darren mentioned, to really help supply chain and inventory and inventory terms and all these good things be much more efficient in the service of customers, and to make a business a lot more productive and efficient.

A second point there too is the whole activation of the data. Digital collects a ton of data, and now we have the ability to analyze that data with artificial intelligence, and to make smarter decisions about how a business operates. And arguably, when you can make smarter decisions, that results in operating margin improvement because your business just runs a lot more efficiently. And it also drives personalization, not only in the customer experience, but personalization in helping people make smart decisions across an entire business, and helping them build that confidence in their roles in the business.

And then a final point for me is that, as digital advances and becomes really prolific and throughout all of society, you've got to build trust in the digital world, and establish your brand as a trusted brand, a trusted source to do business with. And using data and learning certainly builds trust, particularly as you serve the experience, but trust in things like payment, trust in things like how you know that when you deal with a brand that your data is secure. And to build this notion of trust into a customer experience is very much part of that whole future-proof of a business. So Chuck, I really think that's where it's headed. Future-proof, data and trust are probably the three things that stand out for me.

Darren Perry:
Yeah, I couldn't agree with those points more, Andy. I think we're certainly seeing that, that data came through in the study. We're seeing it in the work that we do day in and day out. We really see our clients and leaders in the digital space moving beyond simply digitizing the work they do, and really looking to harness digital as a powerful vehicle for future growth. With that, they're doing all the things that you just mentioned, they're making connections with the data analytics across business functions and objectives. They are very much appreciative of the role that trust will play going forward.

And as I think about trust, it comes about in a few different areas as it relates to digital. One, you made a point earlier about leaders needing to embrace the ecosystem. And I think the more that companies move to digital business models, there is more sharing of data, sharing of information. There is more co-investment. And so, I think being known as a trusted partner in the ecosystem and sharing in the economics of some of these solutions is critical.

The second area of trust is being known as the source of truth, as you're developing particularly solutions related to data that informed decisions of others. And then the third one, which is probably the most obvious one as we move into a world where companies who are pushing the ball forward with digital, are engaging more with clients outside of their four walls digitally, they are leveraging data outside their four walls digitally, is just the role of cybersecurity, as you mentioned. But with those things, I think we're at a point, a reflection point here, where digital leaders are going to be driving some really exciting change in the next few years.

The one that has been taking place over many years is just rethinking how the business goes to market, but that will be newer for some sectors than others. For instance, many of the industrial clients that we work with are really starting to move into this domain in a newer way. Second is, I think we're going to see leaders really building products and services that are powered without humans. And of course that's the topic du jour as it relates to artificial intelligence, but we're going to see some big gains in that area in the coming years. And then lastly, and tied back to this theme of growth, we are seeing digital leaders, will continue to see leaders, really create entirely new markets with digital and data solutions, which gets us pretty excited as strategy consultants. So it's a fun time, and I look forward to being part of it, and I look forward to seeing how these opportunities play out.

Chuck Reynolds:
Yeah well, thank you very much Andy and Darren, really appreciate you both taking the time to chat about the digital impact study. We're happy to provide a much more detailed discussions and invite you to connect with L.E.K., and our digital service line, to think about how this study can move forward your agenda, and the ever-evolving digital landscape. So thank you very much. Really appreciate your time, and look forward to the conversation.

Host:
Thank you, our listeners, for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online, at LEK.com.