This article first appeared in Digital Edge, The Edge Malaysia Weekly on March 8, 2021 - March 14, 2021

Budget constraints have always been one of the biggest concerns for companies that want to embark on digital transformation. Last December, EY conducted a survey of 1,001 executives globally to understand their digital investment strategies.

The resulting EY Digital Investment Index showed that while many companies have adopted emerging technologies, they face challenges in scaling them. Some also struggle to measure the returns on their digital investments.

Digital Edge talks to EY Malaysia’s strategy and transactions leaders George Koshy (left)and Ng Boon Hui about the matter.

Digital Edge: What are some of the significant results from the survey?

Ng: We classified our respondents into leaders and non-leaders. Leaders are those who have achieved returns of around six percentage points more on digital investments [compared with non-leaders] and reported stronger revenue growth over the past two years. 

Over 60% of these leaders have been shifting their focus from in-house development of technology solutions to mergers and acquisitions (M&A) and partnerships to accelerate their digital initiatives.

They are also shifting their focus to digital initiatives that can generate immediate cash returns, and close to 50% of them have discontinued unnecessary digital initiatives. Lastly, they are accelerating the development of new digital products and services.

The survey highlights that the optimal approach is balancing organic (in-house development) and inorganic (M&A) strategies. How should companies decide? 

Koshy: Whether you buy or build, you need to look at the industry that you are in. If you are at the starting point of the race, you have the luxury of time to build solutions. But if the race has already started and you are trying to catch up, M&A will be the way forward. 

Ng: Companies need to look at their existing portfolio, identify the gaps and examine whether they have the capability to drive the digital initiative themselves or have to look outside. If it’s the latter, do they have the funding to acquire? Should they strike up a partnership or broker an alliance?

If they want to build solutions internally, the company needs to have strong innovation capabilities to rival start-ups. They can also consider a buy model approach, where they maintain the traditional IT office to do the business-as-usual operations and have a separate IT innovation team with an entrepreneurial mindset to drive new digital initiatives. 

M&A is an expensive exercise, so there are four areas you should consider. First, you need to align [the goals of] your executives and have the right mixture of investments, which could be through M&As or partnerships. 

Second, you must have internal alignment [of goals] and think about how [the acquisition] can collaborate with other divisions. There is a need for a governing body to provide oversight and accountability. How are you going to measure the success of the acquisition?

Third, there also needs to be clear accountability for each investment vehicle. For instance, the chief development officer can lead in-house initiatives, the CEO can focus on partnerships and the chief financial officer can lead corporate ventures.

Lastly, companies must understand the potential that can be achieved with an acquisition and align it with their overall strategy. 

How should companies budget for digital transformation?

Koshy: How many initiatives do you want to drive? You need to have a long-term investment strategy aligned to where the business is going. For instance, if you want to change the entire business model to become very e-commerce driven, there are a lot of initiatives that you need to do and you’ll have to invest heavily.

I think another key point is there needs to be a constant review of the operating model. It’s always important to look at the digital assets that you have and evaluate how well they are being integrated into your operating model and giving you a return on digital investment (RODI). 

Ng: Companies that already have existing technology and infrastructure should leverage the Internet of Things (IoT) and cloud computing to drive value from big data. They already have the data, so they just need to analyse and provide solutions based on it.

To do this, they need to make sure they are client-centred, experienced-led and outcome-focused. There also needs to be a focus on the quality of data. They need to know how to measure the success of the digital initiatives and the ultimate value that is going to be delivered.

Additionally, companies need to decide on an operating model that meets current and future needs, and ensure that the technology invested can be used beyond a single project, since the investment is likely sizeable. 

Companies that have not ventured into digitalisation should focus on the basic items, like what kind of tech infrastructure, connectivity and applications they need, as well as the talent and operating models suitable for the time.

Any other advice for companies?

Ng: Companies need to have a strong governance model and key performance indicators for their digital investments. The leaders in our survey measure the RODI to evaluate the effectiveness of their digital transformation plans.

There are four things to focus on if you want to measure RODI. First, executive goals and metrics must be aligned to the digital strategies. Second, you need to evaluate the most strategic business solutions and identify where you can drive revenue. Third, you should have an agile and proactive programme management office and digital governance board to manage the innovation funnel. Lastly, you should identify the enabler [technologies] that can help you generate higher revenues and achieve cost savings. 

Koshy: Successful digital transformation requires an innovative culture to be instilled in companies. It needs to be a clear vision from the top down. People also need to realise that digital initiatives have to be translated into actionable business strategies. 

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