Four ways digital leaders are accelerating their innovation strategy
By Thomas Holm Møller, Sri Prabhakaran and Joongshik Wang
As many organizations feel the need to transform their operations and demonstrate results, their digital investments are again breaking records this year, up 65% from 2020, according to the EY-Parthenon Digital Investment Index 2022 (DII), a study of 1,500 C-level executives with responsibility for digital transformation and technology decision-making.
Speed and success are key. Nearly three-quarters of leaders (72%) say they need to radically transform their operations over the next two years to stay competitive, up from 62% in 2020.
Leaders in digital performance
A select group of “digital performance leaders” are breaking away from the pack.
This group, which represents 8% of the survey sample, includes organizations whose leaders are “strongly willing” to lead others on digital initiatives. Respondents report that they are more likely to outperform digital investments and mature digital investments faster.
Digital performance leaders are also more likely to track the performance of digital investments and drive greater financial impact (Figure 1).
Figure 1: Financial impact of digital investments as reported by survey respondents
The secrets of their success
Digital leaders have realized outsized value creation by investing heavily in core capabilities and growing their teams, technology, and data platforms. Leaders took four key actions to accelerate their digital strategies:
- Focus digital investments on innovation and new products and services. Executives say their digital investments in 2021 improved the customer experience (55%) and supported the launch of digital products and services (58%). And 48% say launching products and services will be a primary focus of their investments.
- Maintain a “fail fast” agile culture. Forty percent of leaders, compared to 28% of other respondents, say they maintain a fail-quick culture that encourages employees to experiment and enables greater agility and speed than previous processes.
- Centralize operating models with a strong, results-driven incentive system. The vast majority (87%) take a centralized approach to governance and oversight of benefits and costs. These companies maintain a clear incentive structure and measures of success. Nearly eight in 10 leaders (79%) have a formal program to identify, measure and report digital results. Leaders create a results management office-like governance program with an agile operating model to provide rigor, speed, and meaning to investment decisions. This program can also track usage and customer feedback with real-time dashboards to provide direct input into current and future strategies.
- Empower team leaders or change agents to socialize and champion digital projects that need further consideration. A large majority of leaders have taken the lessons of the pandemic to heart: maintaining flexibility in their workplace, developing new strategies to attract talent, and formalizing approaches to measuring the results of digital investments. Digital leaders stand out by evaluating the impact of company culture on digital transformation strategies and initiatives: 46% say they consider culture changes when mapping digital strategies, compared to 31% of others. Leaders are also significantly less likely than others to cite talent and skill gaps and lack of alignment across organizational units as barriers to achieving a high digital return on investment (RODI).
The next frontier
While others may choose inorganic investment vehicles such as acquisitions for market expansion or short-term financial gains, digital performance leaders use these investments to learn and experiment, strengthen existing customer relationships and support cultural transformation.
Figure 2: Digital investment maturity stages
Leaders also stand out for increasing their investment in more sophisticated technologies (Figure 2), signaling the full realization of the benefits of physical robotics and automation (72%, vs. 36% of other respondents) and artificial intelligence (AI) (39%, compared to 19% of the others). While most companies plan to focus their investments on the cloud and the Internet of Things (IoT) while continuing to build fundamental data and analytics capabilities, executives are more likely to invest in advanced technologies such as the blockchain (30% against 20% of the others). over the next two years.
The link to total shareholder returns
Another study found a strong link between total shareholder return (TSR) and digital activity, such as patents and mergers and acquisitions (M&A).
A recent EY analysis of the Russell 3000 (excluding Meta Platforms, Apple, Microsoft, Google, Amazon, asset managers and regional banks) between January 1, 2019 and December 31, 2021 reveals that companies that made organic investments and inorganic in digital innovation – particularly via proprietary technology, enterprise venture capital (EVC), or mergers and acquisitions – had a higher TSR over the annualized three-year period than firms above the median of transactions or the number of patent families (see Figure 3).
Figure 3: TSR, number of digital transactions and digital innovation
In turn, companies above the median in digital deal activity or digital innovation strength executed nearly four times as many digital-focused deals – including M&A financing. gated or HVAC of targets in a numerical category over the past four years – than the lowest performing quartile and had more than 30% higher TSR (Figure 4). Innovative strength is a multi-dimensional measure derived from digitally-focused patent family statistics and assessed against the constituents of a company’s Russell 3000 sector.
Figure 4: TSR, number of digital transactions and strength of digital innovation
Accelerating innovation for tomorrow
The 2022 EY-Parthenon Digital Investment Index indicates that organizations currently investing heavily in digital transformation efforts must continue to measure results and adjust their plans accordingly. Across all sectors, companies will need to focus on scaling technology solutions and realizing benefits as they scale up investment in high-priority projects.
The survey also illustrates the importance of choosing the right combination of organic and inorganic vehicles. Digital leaders who make the right choices can reap substantial rewards.
Find out how the EY-Parthenon teams can help you drive your digital investment strategy.
The EY-Parthenon Digital Investment Index is a survey conducted by Oxford Economics between January and March 2022 among senior executives of leading companies around the world. The results are based on interviews with 1,500 global business executives about their digital strategies and investment results. Respondents include companies from more than 30 countries, across eight industries.
Thomas Holm soft is the digital leader of EY-Parthenon EMEIA. Sri Prabhakaran is EY-Parthenon Director, Digital Strategy and Transactions at Ernst & Young LLP. Joongshik Wang is the leader of EY-Parthenon Asean. The views expressed in this article are the views of the authors and do not necessarily reflect the views of the global EY organization or its member firms.