By Thomas Holm Møller, Sri Prabhakaran, and Joongshik Wang
With many organizations feeling the heat to transform operations and demonstrate results, their digital investments are breaking records again this year, up 65% from 2020, according to the EY-Parthenon 2022 Digital Investment Index (DII), a study of 1,500 global C- level executives with digital transformation and technology decision-making responsibility.
Speed and success are critical. Nearly three-quarters of executives (72%) say they must radically transform their operations during the next two years to compete—up from 62% in 2020.
Digital Performance Leaders
A select group of “digital performance leaders” is separating itself from the pack.
This group, 8% of the survey sample, includes organizations with executives who “strongly agree” they lead others on digital initiatives. Report that they are more responding likely to outperform on digital investments, and mature digital investments faster.
Digital performance leaders are also more likely to track performance on digital investments and generate 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 achieved outsized value creation by investing heavily in foundational capabilities and building their teams, technology, and data platforms. Leaders have taken four key actions to accelerate their digital strategies:
- Focus digital investments on innovation and new products and services. Leaders report that their 2021 digital investments improved customer experiences (55%) and supported the launch of digital products and services (58%). And 48% say launching products and services will be a top goal for their investments.
- Maintain a “fail fast,” agile culture. Forty percent of leaders, compared to 28% of others surveyed, say they maintain a fail-fast culture that encourages employees to experiment and allows for increased agility and speed over earlier processes.
- Centralize operating models with a strong, outcome-driven incentive system. The vast majority (87%) take a centralized governance and oversight approach to benefits and costs. These companies maintain a clear incentive structure and measures of success. Nearly eight out of 10 (79%) leaders have a formal program to identify, measure, and report digital outcomes. Leaders create an outcome management office-style governance program with an agile operating model to provide rigor, speed, and meaning to investment decisions. This program can also track use and customer feedback with real-time dashboards to provide direct input into current and future strategies.
- Empower team leads or change agents to socialize and champion digital projects requiring more scrutiny. A vast majority of leaders have taken to heart of the pandemic: retaining flexibility in their workplace, developing new strategies to attract talent, and formalizing approaches to measure digital investment outcomes. Digital leaders distinguish themselves by assessing 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 much less likely than others to cite talent and skills gaps and lack of alignment among organizational units as obstacles to achieving a high return on digital investment (RODI).
The Next Frontier
While others may choose inorganic investment vehicles such as acquisitions for market expansion or near-term financial gains, digital performance leaders use these investments to learn and experiment, strengthen existing customer relationships, and support cultural transformation.
Figure 2: Stages of digital investment maturity
Leaders are also distinguished by the progress of their investments in more sophisticated technologies (Figure 2), reporting full benefit realization of physical robotics and automation (72%, compared to 36% of others surveyed) and artificial intelligence (AI) (39%, compared to 19% of others). While most companies plan to focus their investments on cloud and Internet of Things (IoT) as they continue to build foundational data and analytics capabilities, leaders are more likely to invest in advanced technologies such as blockchain (30% vs. 20% of others) during the next two years.
The Link to Total Shareholder Returns
Another study found a strong connection between total shareholder returns (TSR) and digital activity, such as patents and mergers and acquisitions (M&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 and inorganic investments in digital Innovation—specifically via patented technology, corporate venture capital (CVC), or M&A—had higher TSR over the annualized three-year period than companies above the median deal or patent family count (see Figure 3).
Figure 3: TSR, digital deal count, and digital innovation
In turn, companies above the median of digital deal activity or digital innovation strength executed nearly four times as many digitally focused deals—including closed M&A or CVC funding of targets in a digital category in the past four years—as the lowest quartile performers and had more than 30% greater TSR (Figure 4). Innovation strength is a multidimensional metric derived from digital-focused patent family statistics and rated relative to a company’s Russell 3000 sector constituents.
Figure 4: TSR, digital deal count, and digital innovation strength
Accelerating Innovation for Tomorrow
The EY-Parthenon 2022 Digital Investment Index indicates that organizations that are now 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 step up their investments in high-priority projects.
The survey also illustrates the importance of choosing the right mix of organic and inorganic vehicles. The digital leaders that make the right choices may reap substantial rewards.
Learn how EY-Parthenon teams can help you drive your digital investment strategy.
The EY-Parthenon Digital Investment Index is a survey of senior executives from large companies around the world, conducted by Oxford Economics between January and March 2022. Results are based on interviews with 1,500 global corporate executives about their digital strategies and investment results. Respondents include companies from more than 30 countries, across eight industries.
Thomas Holm Møller is EY-Parthenon EMEIA digital leader. Sri Prabhakaran is EY-Parthenon principal, digital strategy and transactions at Ernst & Young LLP. Joongshik Wang is EY-Parthenon Asean leader. The views reflected 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.