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Why management must set long-term objectives for digital journeys
There is no quick return on investment and some projects may pose huge business risks, but business executives need to hold their nerve
Recent reports have suggested that the UK will suffer economically as lockdown restrictions are lifted, because of low adoption of digital technologies in business.
The CBI report Building a world-class innovation and digital economy warned recently that a failure to adopt and diffuse innovation throughout the economy has contributed to the UK’s relatively low productivity levels and has made it more challenging for some firms to adapt to changes brought about by Covid-19.
In the report, the CBI revealed that the UK came 16th out of 36 European countries when it assessed the adoption of product and process innovation among small and medium-sized enterprises.
Meanwhile, a new paper from Investcorp suggests that across European economies, businesses have struggled to make the most of what digital technologies can offer.
Daniel Lopez-Cruz, head of private equity, Europe at Investcorp, believes public perception of digital transformation is not aligned with the hard facts. He said: “People think we live in a world where everyone embraces everything and most companies have invested heavily in digital technologies.”
But according to Investcorp, the reality is that the level of adoption is very low in businesses across all sectors. Lopez-Cruz added: “Looking at economies in Western countries, we still have no more than 20% adoption in digital technologies.”
In Investcorp’s paper Digital process automation: driver of future economic growth, Lopez-Cruz and fellow authors Sebastian Ingerand and Pierre Schaeffer wrote that disparities in adoption across industries and firms remain and may be linked to intrinsic differences in technological needs.
“Firms with greater access to capital and key technical, managerial and organisational skills have been able to better unlock the value of these technologies,” they wrote. “Industries and activities involving more simple and routine tasks stand to benefit more from digitisation.”
Even in sectors where digital investments have been in place for a while, such as financial services, Lopez-Cruz said the level of adoption has been low.
The paper warned that the costs associated with the digitisation process might not be directly offset by the immediate benefits of productivity and additional top-line generation. Costs can include the time dedicated by management, implementation and transition costs for technology and people. This means the net effect in the short term may not be positive, said InvestCorp.
Although there is no denying the long-term benefits of digitising a business, these processes can require significant managerial attention that may be diverted from day-to-day operational matters. This period of transition might also entail duplicated operational costs, while management might need to develop extra skills to cope with the change.
Asked whether the cost of digitisation projects is too high, Lopez-Cruz said: “The perception of payback is not strong enough.”
For instance, management not only has to invest in implementing a new system, but if the implementation goes wrong, it will have serious consequences for the business. “Even if you have budget and management bandwidth, these things don’t happen overnight,” said Lopez-Cruz.
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For example, replacing paper-based processes in a hospital requires a hospital-wide system. The tender process will usually take a few years, and then the company that wins the tender will spend a further few years building a test system. When the system is finally deployed, there may be a further 12 to 18 months of debugging.
According to Lopez-Cruz, it would be extremely ambitious to try to have such a system up and running in less than five years.
He warned that in management, long-term investments tend to have a narrow focus. For instance, enterprise resource planning (ERP) is a big investment for most businesses, but management typically looks at such a project as a way to optimise costs.
“This may not be enough of a reward,” he said. “But there may be tangible objectives once the ERP is up and running.” For example, quality and speed can multiply as the business changes a bit to improve processes, and the project will also provide more visibility into the supply chain, he said.
For Lopez-Cruz, digital transformation is a journey, where an organisation makes discrete investments to get from A to B. “It is a long process,” he said. “You should be fully aware it is a journey, which takes you to new places.”
He urged business leaders not to consider software purchase as simply a matter of buying software licences. “You are going to radically change more of the business,” he said. “You will need to change processes and do things in a different way.”
These investments take time, and can be costly if they go wrong, said Lopez-Cruz. “There is a risk – but you have to embrace it.”