Digitisation can drive substantial bottom-line benefits for most enterprises – our research covering 10 consumer facing sectors shows that digital can drive a 56% uplift in profits over the next 5 years.
But big benefit requires big investment. Assuming (conservatively) a dollar invested for each dollar delivered to the bottom line, and investments spread evenly over 5 years, firms seeking to realise their full digital potential will on average need to invest 10% of their profits each year into digital. To put that into context – for large global corporations the bill for digitisation will exceed one billion dollars a year.
Finding a billion is never easy. But firms of any size will struggle to fund investment on the scale of 10% of profits. So how should digital be funded? Here are six tried-and-tested methods:
1. Cut existing investments that are misaligned with a digital future. Surprisingly, many firms are still investing in pre-digital business models. For example, the shift to digital distribution in sectors like travel and banking mean that investments in high-touch channels, such as call centres and branches, may no longer make sense.
2. Cut operating expenses in areas where demand is falling. Digital is driving rapid shifts in customer behaviour in many sectors. 20% of non-food retail sales in the UK are now via digital channels for example. Firms can cut opex in hi-touch channels such as call centres, as customers shift to lower cost digital channels. And that channel shift can be accelerated with little expenditure (e.g., in-store digital kiosks).
3. Lean on suppliers. Much of digital investment ends up in the hands of technology companies. Many technology firms are cash rich, and may be able to help bridge funding gaps (e.g., through asset transfer). Digital also provides tools for procuring at lower cost (e.g. e-auctions) and allows part of the IT budget to be drastically reduced through switching to cloud services (e.g. web-site hosting).
4. Get something for nothing. Digital provides tools that allow some activities to be sourced at zero cost. For example many technology companies rely on unpaid user advocates to provide customer support. Co-creating with customers can take the place of expensive research projects.
5. Monetise digital assets. Data – particularly customer data – has intrinsic value. Digital allows that value to be released. For example, banks can monetize credit card data by sharing it with retailers (in anonymous form). Telcos can monetize customer location data through tie-ups with insurers etc.
6. Prioritise rapid return projects. Unlike old-school IT projects, many digitisation projects deliver rapid payback – sometimes in weeks. Prioritising these projects generates benefits that can be re-invested in further projects.
Together these six levers are typically sufficient to kick-start a major digital program. Once a well-architected digital transformation is up and running, it should soon become self funding.