WEF 2018 05-DTI-Maximizing-the-Return-on-Digital-Investments PDF

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System Initiative on Shaping the Future of Digital Economy and Society

Digital Transformation Initiative Maximizing the Return on Digital Investments In collaboration with Accenture May 2018

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© World Economic Forum 2018 – All right s reserved No p art of this publication may be rep roduced or transmit ted in any f orm or by any means, including photocopying and recording, or by any information storage and retrieval system. The views expressed are those of certain p articip ants in the discussion, and do not necessarily reflect the views of all participants or of t he World Economic Forum.

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Foreword

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Executive Summary

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Objectives and Approach

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Value Impact of Digital Investments

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Maximizing Value from Digital Investments

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Questions for Further Investigation

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Acknowledgements

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Endnotes

The Digital Transformation Initiative (DTI) was launched by the World Economic Forum in 2015 as part of the System Initiative on Shaping the Future of Digital Economy and Society. It is an ongoing project that serves as the focal point at the Forum for new opportunities and themes arising from the latest developments in the digitalization of business and society. It supports the Forum’s broader activity around the theme of the Fourth Industrial Revolution. More about the DTI is available at http://reports.weforum.org/digitaltransformation. The views expressed in this White Paper are those of the author(s) and do not necessarily represent the views of the World Economic Forum or its Members and Partners. White Papers are submitted to the World Economic Forum as contributions to its insight areas and interactions, and the Forum makes the final decision on the publication of the White Paper. White Papers describe research in progress by the author(s) and are published to elicit comments and further debate.

Foreword Digital transformation is occurring at an unprecedented pace. It is a key driver of sweeping change in the world, improving people’s lives and creating a more connected world. It also opens new opportunities for businesses to grow and create value.

Jonas Prising Chairman and Chief Executive Officer ManpowerGroup

Arne Sorenson President and Chief Executive Officer Marriott International

Companies are using new technologies, such as the internet of things (IoT), robotics, artificial intelligence (AI), big data analytics and mobile/social media to build new business models, enhance customer experiences and drive new efficiencies. While the applications have significant potential, only a few organizations are ready to take full advantage of them, which is fuelling a debate around the productivity impact of digital investments. Organizations must identify where to best take advantage of digitalization and invest in the activities that will have the most positive impact and accelerate their performance in the long term. Most business leaders understand the potential effect of digital transformation on business and society. However, many do not see a clear path to bridging the gaps that inevitably occur when innovation moves faster than existing organizational and societal frameworks. This creates a gap between leadership’s strategic digital intent and its operational execution. This is one of the main inhibitors to unlocking the value of digitalization and to the Fourth Industrial Revolution. This paper, which forms part of the World Economic Forum Digital Transformation Initiative (DTI), aims to contribute to the debate on the return on digital investments. Through quantitative and qualitative analyses of existing digital investments, it provides a framework to give business leaders the best possible chance of addressing many challenges – driving cultural change, bridging the digital skills gap across workforce levels, changing customer expectations, data privacy and security – and maximizing the return on upcoming investments. Launched in 2015, the DTI serves as the focal point for new opportunities and themes arising from the latest developments in the digital transformation of business and society. Since its inception, the initiative has analysed the impact of digital transformation on 12 industries and several cross-industry themes to drive engagement on some of the most pressing topics facing industries and businesses today. DTI is part of the World Economic Forum System Initiative on Shaping the Future of Digital Economy and Society and supports the Forum’s broader activities around the theme of the Fourth Industrial Revolution. This paper was prepared in collaboration with Accenture, whom we thank for their support. We would also like to thank the World Economic Forum community of digital leaders and industry experts who helped shape the insights and recommendations.

Bruce Weinelt Head of Digital Transformation World Economic Forum

The paper embodies the World Economic Forum’s commitment to helping leaders understand the implications of digital transformation. We are confident that the findings will support them on the journey to shape better opportunities for business and society.

Maximizing the Return on Digital Investments

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Executive Summary

Digital technologies offer new ways for companies to grow and be more productive. However, it is not completely clear how investments in new technologies impact productivity. This White Paper addresses that issue by analysing the business value impact of new technology investments and providing recommendations for maximizing that value. It includes an econometric analysis of the productivity impact of new technologies using data from a sample of over 16,000 companies from 14 industries and an analysis, through interviews and workshops with industry leaders, of key enablers and execution principles to maximize the return on digital investments. The analysis of productivity and new technology investment data led to the following observations: – Companies in the sample realized revenue and productivity growth over the past decade. – However, these gains were not evenly distributed. The growth was driven by a small group of industry leaders (the top 20% of companies by productivity within each industry)1. – Companies are investing in new technologies to accelerate growth and productivity. From 2016 to 2020, total new technology spend is expected to increase by 13% compound annual growth rate to $2.4 trillion per year, led by the internet of things (IoT) (42% of total spend in 2020)2. – These investments are made to drive new efficiencies, enhanced customer experiences and new business models, with new efficiencies being the most prominent driver to date. – While there are concerns about technologies, such as artificial intelligence (AI) and robotics process automation, causing worker displacement, overall employment levels have remained stable over the past decade.

The quantitative analysis of companies’ return on digital investments resulted in four key findings: 1. The return on investment in new technologies is positive overall. The productivity increase is three times higher when technologies are deployed in combination. 2. The return on digital investments varies by industry, and industry leaders achieve a greater productivity increase from investments in new technology than followers (70% vs 30%). The leaders in a majority of industries tend to be larger companies by revenue. 3. Asset-heavy industries realize more value from robotics; asset-light industries realize greater value from mobile/social media, primarily led by efficiency-driven opportunities. 4. While industry leaders realize higher overall return from robotics and mobile/social investments, followers have gained more from IoT and cognitive technologies (artificial intelligence and big data analytics). Five key enablers to maximize the return on digital investments emerged from the discussions with industry leaders: 1. Agile and digital-savvy leadership: Maintaining a strategic vision, purpose, skills, intent and alignment across management levels to ensure a nimble decisionmaking process on innovation 2. Forward-looking skills agenda: Infusing a digital mindset in the workforce by making innovation the focus of training and hiring programmes 3. Ecosystem thinking: Collaborating within the value chain (e.g. with suppliers, distributors, customers) and outside (e.g. start-ups, academia) 4. Data access and management: Driving competitiveness through strong data infrastructure and warehouse capability combined with the right analytics and communication tools 5. Technology infrastructure readiness: Building the required technology infrastructure to ensure strong capabilities on cloud, cybersecurity and interoperability In addition, industry leaders also emphasized that the successful execution of these enablers would require companies to establish clear ownership of the digital transformation, invest in specific use cases (vs individual technologies) and follow an outcome-based approach that is agile and flexible to allow failure at minimal costs.

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Digital Transformation Initiative

Objectives and Approach

The Digital Transformation Initiative (DTI) was launched by the World Economic Forum in 2015 to serve as the focal point for new opportunities and themes arising from the latest developments in the digitalization of business and society. Over the past two years, the DTI has analysed the impact of digital transformation across 12 industries and a number of cross-industry themes with inputs from more than 450 subject-matter experts, including over 200 chief executive officers. Now in its third year, the DTI’s focus is on driving the global conversation to enhance societal and business value from digitalization. DTI’s latest project, Maximizing Returns on Digital Investments, explores the unclear relationship between IT investment and productivity. Some economists believe that new digital technologies will never impact productivity, jobs or growth in the positive way that the steam engine, the assembly line3 and the computer did in previous industrial revolutions. Others, however, are at least cautiously optimistic.4 Companies want to understand how the adoption of new technologies impacts productivity. They have the strategic intent to invest in these technologies, but cannot see a clear path to positive returns because a number of questions remain unanswered: – How much value are companies getting from digital investments? – How do returns on digital investments vary by company, industry and technology? – How can companies maximize return from their digital investments? – How can companies successfully execute on digital investment projects?

This White Paper addresses these questions by analysing the value impact of investments in new technologies and providing recommendations for maximizing that value. The research combines quantitative and qualitative analyses of new technology investments. Data from over 16,000 public companies across 14 industries were analysed to estimate the productivity impact of investments in new technologies. The 14 industries covered are: automotive, aviation and travel, chemistry and advanced materials, consumer, electricity, financial services, healthcare, logistics, media, mining and metals, oil and gas, professional services, retail and telecommunications. Data on new information and communication technologies (ICT) spend by companies, industries and technologies were sourced from International Data Corporation (IDC) and Ovum, with company financial data for 2015 and 2016 sourced from Capital IQ. The return on digital investment impact estimates are based on an econometric regression model for investments in new technologies and the performance measures of top-line growth and labour productivity (earnings before interest, taxes, depreciation and amortization [EBITDA] per employee). The model controls for the effects specific to industries, geographic regions, company size and time trends. To keep the quantitative results tractable, technologies were grouped into four categories (Figure 1) based on investment levels and their place in the production process.

Figure 1: Four Areas of Technological Investment

Cognitive technologies

IoT/Connected devices

Robotics

Mobile/Social media

Source: World Economic Forum/Accenture Analysis Maximizing the Return on Digital Investments

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Technology category definitions – Cognitive technologies include artificial intelligence (AI) and big data analytics (BDA). AI uses deep natural language processing and understanding to answer questions and provide recommendations. BDA is a new generation of technologies and architectures designed to extract value efficiently from very large volumes of variform data. – IoT/Connected devices refers to a network of networks aggregating and linking uniquely identifiable endpoints (or “things”) that communicate autonomously using internet protocol connectivity. – Robotics encompasses the design, construction, implementation and operation of robots. Robotics process automation, cognitive interfaces and other software applications that are not capable of movement are excluded. – Mobile/social media include mobility solutions and social technologies. Mobility solutions include the devices, software, infrastructure and related services that enable mobile data services. Social technologies facilitate collaboration between internal stakeholders, partners, vendors and customers, as well as the extraction of data from these communications.

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Digital Transformation Initiative

In addition to the quantitative analysis, a comprehensive text analysis of leading business and IT publications revealed some key themes around enablers to maximize value from digital investments. The analysis covered articles on topics including IT, product and service development, corporate strategy, regulation and government policy, published between 2012 and 2017. Articles were screened for any mention of the four technology categories in conjunction with the words “enabler” and “inhibitor”, and were then weighted by the frequency with which each identified theme was mentioned. The results were consolidated and validated through industry interviews and an executive workshop to arrive at five key enablers and four execution principles for successful digital investments.

Value Impact of Digital Investments

12% CAGR 220 180 140 100 60

a. Productivity and new technology investment trends

2006

2007

2008

All Companies

While general macro-level productivity growth is still slow5, companies in the study sample enjoyed strong overall revenue and productivity growth over the past decade (Figure 2), also driven by an improved business environment and growing consumer demand, particularly since the economic crisis of 2008. It was also observed that, contrary to concerns about such new technologies as AI and robotics process automation causing worker displacement, employment levels for our sample of companies were stable. Figure 2: Average Revenue, Productivity and Employment Trend (2006-2016, baseline 2006) Index (2006 = 100)

Figure 3: Average Productivity Trend – Industry Leaders vs Followers (2006-2016, baseline 2006)

Index (2006 = 100)

It is widely recognized that digital technologies help to increase cost effectiveness, enhance existing revenue streams and open new ones. As the costs of new technologies, such as 3D printing and robotics, have decreased over the past decade, companies have increased digital investments to capture the value. Before taking a closer look at the impact of digital investments on productivity and how companies can maximize it, it is important to understand wider technology investment and productivity drivers and trends.

160 140 120

2009

2010

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Industry Leaders

2% CAGR 2013 2014 2015

2016

Industry Followers

Note: CAGR = compound annual growth rate Source: World Economic Forum/Accenture Analysis based on Capital IQ data

With the aim of accelerating growth and productivity, companies are investing more in new technologies. They have been encouraged by the reduced cost of technologies, such as 3D printing and robotics. IDC estimates that, between 2016 and 2020, corporate spending on new technologies will grow by 13% CAGR to $2.4 trillion per year (Figure 4).6 The growth will be led by investments in IoT, which is estimated to contribute 42% of total new technology spend in 2020 (~$1.0 trillion). Investments in mobile/social media are expected to remain almost stable, sending their share of total investments down from 35% to 25%.

100 80 60 2006

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Productivity

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2011

Employees

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2015 2016

Revenue

Source: World Economic Forum/Accenture Analysis based on Capital IQ data

However, not all companies realized similar productivity increases. The overall increase in labour productivity was driven by the most productive 20% of companies in each industry. These industry leaders more than doubled their productivity, while the rest (industry followers) saw their average productivity level fall. Even in the period after the economic crisis (2011-2016), industry leaders delivered 12% compound annual growth rate (CAGR) in productivity while followers managed only 2% CAGR (Figure 3). This widening productivity gap confirms the need to find new ways of unlocking productivity growth.

Maximizing the Return on Digital Investments

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Figure 4: Corporate Spending on New Technologies, $ billion (2016-2020)

Corporate spending ($ billion)

13% CAGR 2,426

2,500

16%

2,000

6% 10%!

1,503

1,500

11% 9%

1,000

25%!

5%

35%!

500 41%!

42%!

2016

2020

0 IoT

Mobile/Social Media

Cognitive Technologies

Robotics

Other

Note: CAGR = compound annual growth rate Source: World Economic Forum/Accenture Analysis based on IDC estimates, excluding cross-industry spend ($80 billion in 2016 and $166 billion in 2020)

b. Drivers of digital investments Investments in new technologies are driven by company objectives. These drivers cluster around three sources of digital value (Table1). New efficiencies are still the primary driver for large companies to invest in new technologies. They use these technologies primarily to improve existing business processes and optimize assets and resources, thus reducing their own costs and enabling savings for their customers.

Siemens – Reshaping the future of manufacturing The industrial conglomerate Siemens strives to digitalize the complete value chain of discrete manufacturing industries, from product and production design to production and services. As a manufacturing company, it is itself a user of its digitalization and automation products and services. For example, Siemens digitalized its major electronics plant in Amberg, Germany, which by now has an automation rate of about 75%. The digitalization improved the efficiency of the plant, as the output was increased by a factor of 10 with a consistent number of employees. It also increased production speed and flexibility; currently, about one product is manufactured per s...