Digitalization is one of the buzzwords in today’s business, and almost every company is working on digital initiatives of one sort or another. At the same time, many of them struggle to come up with a quantifiable business case for funding the initiatives and are hesitant to take a leap of faith without a solid financial backrest or prior experience of this new field of investment. How should you then measure the value of digital when it’s the first time many companies are investing in digitizing their businesses?
Instead of trying to figure out a business case for individual investments, the companies could be looking at the overall value of digital. If a company is further along its digitalization path, what difference does it make? Do the more digitally advanced companies achieve better growth, or are they more profitable than their less advanced peers? Our experience and findings at KPMG suggest that the answer is a resounding “Yes”.
First, let’s look at how to measure how advanced a company is in digitalization, i.e. its digital maturity. The KPMG Global Strategy Group measures digital maturity by its 9 Levers of Value framework. Each lever is assessed by a set of questions designed to evaluate how far the company has traveled in its digital journey, evaluated on a scale of 1 to 5, from low to high digital maturity.
Companies with an overall digital maturity score of more than 4 are considered digitally advanced and companies with an overall score of less than 2 are considered digitally immature.
KPMG recently tested the digital maturity framework through a survey of 200 companies globally where, in addition to questions about the digital maturity, companies were asked about their revenue, market share and profitability growth, as well as other key performance indicators, over the past three years. The initial results show very clearly that the more digitally advanced companies grow faster, gain market share and are more profitable than their digitally immature peers.
The companies analyzed represent a wide spectrum of industries. Are there any differences between industries in terms of their digital maturity?
Telecoms, Media and Technology are the predictable leaders in digitalization, followed by Banking, Insurance, Power & Utilities and Oil & Gas. Maybe a bit surprisingly to the casual online shopper, consumer goods and retail are well below the overall average score across all industries, while healthcare & life sciences and industrial manufacturing bring up the rear.
The difference in digital maturity between different industries does not mean that the more advanced industries are better than the less advanced. It simply means that the industries are at a different point in their digitalization journey and that some industries may be inherently more suitable for digitalization. Having said that, a digitally less advanced industry may be more susceptible to competition originating from outside the industry, e.g. technology companies entering into the payment business (Apple Pay), or platforms disrupting travel & transportation businesses (Uber, Airbnb) or taking a slice of the restaurant business (DoorDash, Foodora, Uber Eats).
What, then, is the financial value of digital maturity to a company? Our analysis shows a clear correlation between a company’s digital maturity and its performance against a number of key performance indicators.
According to our analysis, digitally advanced companies achieve 4.3 times the revenue growth, 5.6 times the market share increase and 4.4 times the profitability growth of their digitally immature peers. Their time to market is less than a third and their customer churn is less than a half. In addition, digitally advanced companies use digital technologies to improve their internal operations, achieving 17% higher operational efficiency improvements.
Even though estimating the business case for a digital investment opportunity may be difficult, it’s still not wise to start throwing money indiscriminately at digital. The digital leaders follow a fail fast approach; they are ready to quickly let go of the opportunity after the proof of concept, or even before, if the investment doesn’t seem to have enough potential. As a result, they get more opportunities through their innovation funnels without using more money, and consequently get a better return on their investments. Whereas digitally immature companies require, on average, a 16 % return on digital investments, digitally advanced companies aim for more than 23 %.
The digital leaders are also good at letting go of old ways. Once new digital services have been launched, they quickly discontinue the old non-digital services in favor of the new way, in order to materialize the benefits of digitalization and avoid overlapping services.
These positive results shouldn’t be surprising to anyone, but there is more to digitalization than meets the eye. While the obvious reasons for KPI improvements may be the digital tools and services used to attract customers or improve efficiency, there is also the human factor to consider. Digitally advanced companies are able to attract and retain a better workforce than their digitally challenged peers. This is clearly evidenced by a more than 40 % lower personnel turnover among digitally advanced companies than among digitally immature ones.
Attracting and retaining talented people may in fact be the true driving force behind the success of digitally advanced companies. A war on talent is raging and digitally advanced companies are at the top of the list for talented young people graduating from the top schools, as well as for more experienced people looking for new challenges.
Companies looking to invest in digital opportunities may be looking into the overall benefits of digitalization in order to justify the investments. Digitally advanced companies are reaching higher growth and profitability, they are getting better returns on their digital investments and they are able to attract and retain a better workforce than their digitally challenged peers.
Here’s some simple advice from the digital leaders you can all follow:
Digital Strategy Lead, Global Strategy Group
+358 20 760 3819