C-suite savvy key to digital transformation success, McKinsey says

Dive Brief:

CFOs who aim to give their companies a competitive edge through digital transformation need to cultivate technological savvy across the C-suite and among other top executives rather than just in the IT department, McKinsey said in a study.
Companies succeeding in a digital transformation outperform their peers by focusing on customer engagement and innovation, McKinsey said. They also build — in a scalable, cloud-based architecture — proprietary assets that combine software, data and artificial intelligence.
“Companies with higher aspirations for digital tech tend to see better outcomes than other companies do,” McKinsey said, citing a survey of 1,331 C-level and other executives in a range of industries and company sizes. “Digital strategies that involve incremental changes or lack ambition don’t deliver the economic success that bolder digital strategies do.”

Dive Insight:

Global spending on digital transformation — encompassing outlays for technology, data, people, processes and governance — will surge to $2.8 trillion in 2025, or more than twice the amount in 2020, according to International Data Corporation (IDC).

Organizations will focus their spending on upgrading a full range of functions, including accounting and finance, human resources, enterprise IT, supply chain management, design and research, manufacturing operations, marketing, sales and customer service, IDC said.

Companies will spend the most on robotic manufacturing, customer/client management and autonomic security operations, according to IDC.

Many top executives are underwhelmed by the return on investment in digital technology, McKinsey said. Few companies sustained over time the financial and operational benefits from various types of digital transformation, including building new digital businesses and strategically changing their core business, McKinsey said, citing its survey.

Building new businesses is most difficult, with 70% of respondents saying they failed over time to meet their initial targets, McKinsey said.

“While organizations have made massive tech-driven changes over the past two years, the survey results suggest that they have captured much less of the value than respondents initially expected,” according to McKinsey.

Top-performing companies, or those that have increased revenue and EBIT by at least 15% over the past three years, netted “a median of 50% of the full revenue benefits that their recent transformations could have achieved” compared with a median of 31% among all respondents, McKinsey said.

Nearly one out of three respondents said their companies are building new digital businesses to enter a strategically important market or industry, and one out of five said they are doing so to incubate new digital capabilities, McKinsey said.

“Many companies are building new digital businesses for reasons other than strictly financial ones, which could explain why a new business is less likely than a core business to hit its targets,” McKinsey said.

Respondents at top-performing companies “report bolder strategic aspirations” and plan to spend twice as much of their digital and technology budgets on building new digital businesses than their less successful peers, McKinsey said.

The top-performers are comparatively more aggressive in adopting practices that enable faster innovation and automated processes to test and deploy new technology, according to McKinsey.

The first tier of companies are also well ahead of their peers in moving operations to the public cloud, “which helps them become more agile, more efficient and better able to maximize the value they get from other digital investments.”