Leading the way

Digitisation, digital disruption, digital transformation and the digitally enfranchised customer.

These buzzwords describe the rapidly increasing combined power of technology, big data, software, hardware, systems and new paradigms of thinking that are driving change in the way we all work, buy, sell, play and engage with others.

Organisations are being hit by rising tidal waves of digitisation, with customers using multi-channel and multi-function devices to search, research, consider, compare and purchase (or not) products and services.

Because of the huge potential effect of digitisation on business value, like nothing seen before, CAs must be across, and at the centre of managing, this. In this article we explain why it can’t be left to the CIO, CMO or even the CEO.

What is digitisation?

A recent IBM study (Stepping up to the Challenge. CMO insights from the Global C-suite) identified five key components of organisational digitisation.

• Customer collaboration using social networks.
• Integrated customer touch points across both physical and digital channels.
• A networked workforce with skills aligned to business opportunities.
• Advanced analytics to capture customer insight across all touch points.
• Digitally enabled supply chain.

In the authors’ view, digitisation is about:

• what’s really happening in a fast changing technological world
• rising customer demand to be at the very centre of digitisation
• continually moving from old customer engagement models to new ones.

Importantly however, digitisation is not about:

• the tools themselves – we see millions of dollars of hardware and software “tools” that have been sold into Australian and New Zealand corporations not being used properly or effectively, that is, wasted
• getting spooked by the tools themselves (rather it’s about focusing on multidirectional links to customers and entity value)
• having to necessarily or automatically spend a lot of money.

Why is digitisation so important for business?

Organisations that are slow to adapt to digitisation and continue to rely on redundant business models can experience very rapid decline in customer loyalty, sales and brand or business value. There is an imperative to evaluate, in both a technology and financial sense, what’s needed and then make the progressive changes to future proof the business.

All major industries are affected by digitisation and the change is ongoing. It is not a “set and forget” where one puts in place a fix that is good for ten years. If you are not active in digitisation, be aware your competitors or “technology leapfrog” new entrants certainly are. And guess which bits of your business they will be targeting? Yes, it’s the high margin business that most makes your organisation valuable.

What’s happening in digitisation?

As information flows grow, automation increases, speed and integration of response to customers is critical. To be relevant and connected 24/7, organisations are being forced not just to adopt new technologies but also to dismantle traditional organisational hierarchies in favour of flat, flexible structures driven by customer activated models.

Transforming major business and government enterprises to maximise the potential value offered by digital technologies – and to counter the threats they also present – will play an important part in reversing any slide in business value. However, this will only happen if enterprises take action and understand the fundamental changes these technologies are fuelling.

Organisations need to be optimised to create great buying experiences or customers will vote with their feet.

In both Australia and New Zealand the level of business adaptation to digitisation is both highly variable, and on average, very low. For example, the IBM study reported 82% of chief marketing officers (CMOs) feel underprepared to deal with the data explosion that prevails across organisations: “The situation is, if anything, worse than it was when we completed our last Global CMO Study,” IBM said. “In 2011, 71% of the CMOs we interviewed told us they felt underprepared to deal with the data explosion.”

That’s not to say CMOs are ignoring technology’s potential. On the contrary, they intend to make even greater use of key marketing technologies in the next three to five years. Predictive analytics and mobile applications feature particularly high on their wishlists. CRMs and social collaboration tools come close behind. And 74% of CMOs intend to partner more extensively in the future to help them realise their goals.

The issue is, rather, that there’s currently a huge gap between aspiration and action. And it’s questionable whether CMOs are moving fast enough to keep up with the speed at which the commercial landscape is evolving.

Who should play what role?

Internally both CIOs (because they are close to the technology) and CMOs (because they are close to the customer) are being asked for strategic input to the business about digitisation – at both CEO and director level. But in our experience, on their own, they lack the financial skills to make balanced decisions based on improvements to enterprise value.

A real alarm for CAs is the 2014 report by McKinsey on digitisation which reported that a total of only 46% of CFOs were involved, supporting or sponsoring digital initiatives (see The Digital Tipping Point). In itself this is a very low figure but more notably the figure was 69% for CIOs and 61% for CMOs.

Additionally both hardware and software suppliers can come to the table with hidden or conflicted agendas – that is, to sell their very expensive wares, as a panacea for digitisation.

The key area of input for CAs then, is the effect, or claimed effect, of digitisation and related solutions on business value. This area needs to be modelled and validated by the CA’s team or advisers, so that the board can have confidence, not just that the new model is customer centric, efficient and enduring, but also that it will yield an appropriate return, on a net present value (NPV) basis.

The strength of NPV analysis using discounted cash flow techniques is that it: [a] takes the capital expenditure cash flows into consideration – sometimes forgotten (or understated) in a pure earnings model; and [b] discounts the future cash flows – especially those sometimes far off promised benefits, to today’s dollars, and (critically) adjusts them for risk.

Where old business models are looking like no longer serving the business and competitors, or new entrants are threatening market position, earnings or enterprise value, the CFO needs to initiate and lead the response. CAs are usually the most influential executive to the CEO and board. It’s essential that CAs are positioned front and centre in digitisation too.