Digital Transformations
In today’s thought leadership, we cover:
- Key Events this week
- Key Insights from our Q3’21 Inside The Buy-Side® Earnings Primer®
Digital transformation communication best practices
Key Events
COVID-19 Update
- More than 230M total COVID-19 cases are reported as of this morning, with more than 4.7M deaths worldwide (Source: John Hopkins); the U.S. is seeing 146,000 new daily cases over the last 7 days, down from 166,000 the week prior
- More than 6B doses of the vaccines have been administered (44.1% of the population), including 54% of the U.S. being fully vaccinated, trailing more than 17 countries and led by Portugal (84.5%), and the United Arab Emirates (81.1%) (Source: World Data)
- FDA authorized a booster dose Wednesday of the Pfizer-BioNTech COVID-19 vaccine for people 65+ and others at high risk of severe COVID-19; data also showed the vaccine is safe and effective for children ages 5-11 (Source: WSJ)
- IHS Markit said its index measuring U.S. business activity, based on surveys on purchasing managers, fell to 54.5 in September from 55.4 in August, the lowest level in a year, as activity at services businesses reached a 14-month low (Source: WSJ)
- IHS Markit also said its index of eurozone activity fell to a 5-month low of 56.1 in September from 59.0 in August; the fall was steeper than predicted (Source: WSJ)
- U.S. Fed officials think inflation risks are to the upside; 6 of 18 FOMC participants think core inflation will be 2.5% or higher next year (Source: WSJ)
Key Insights
Last week, we outlined a growing number of companies that issued updated guidance or withdrew previous guidance due to supply chain disruption, inflation and weather events, including Ecolab, PPG Industries, Sherwin-Williams, and The Timken Company.
These trends have continued this week with companies, all updating guidance amid the challenging operating environment, including:
- Americold Realty Trust (REIT: $8.0B)
- Axalta (Materials: $6.7B)
- Brink’s (Industrials: $3.3B)
- D.R. Horton (Resi Construction: $31.4B)
- HNI Corporation (Industrials: $1.8B)
- Li Auto (Auto: $28.1B)
So, what are investors thinking? Based on preliminary findings from our Q3’21 Inside The Buy-Side® Earnings Primer® survey, which currently comprises views from 30 investors and analysts, 80% expect companies to either maintain guidance (56%) or lower (27%). A minority at this point, 17%, expect companies to beat and raise. While these trends are early, we are likely to see more expecting lowered guidance as the number of companies pre-issuing guidance continues to climb, which we expect.
Over the past decade, digital transformations have become an imperative for corporations of all sizes, with the pandemic further bolstering the urgency for new, innovative ways of managing businesses, including around the supply chain, customer experience, and the health and safety of workers. In fact, due to the complexity ushered in by COVID-19, companies have accelerated their transformations by three to four years,1 but historical trends indicate only ~30% of companies navigate a digital transformation successfully.2
In our experience, investors often report challenges in measuring and evaluating the impact of digital transformations, which is often compounded by suboptimal communication on journey details (buckets of investment, size of the investment, specific initiatives, timeframe, etc.) and intended outcomes to the investment community.
To provide research-driven insights into digital transformation communication best practices, including key focus areas and goals, we analyzed 10 public companies across sectors >$1 billion in market cap that have published robust communications throughout their transformations. Furthermore, our proprietary research shows these firms have consistently outperformed the S&P 500 over short-, mid- and long-term timeframes, and more than doubling the performance of the index over the past year.
10 Public Companies Across Sectors >$1 Billion in Market Cap That Have Published Robust Communications Throughout Their Transformations
Top Elements Communicated in a Digital Transformation – Anchored by Goals, Customer Centricity, and Digital Technologies/Tools
A multifaceted digital transformation is a complex undertaking for any corporation. but As it pertains to external communication, companies must depict the journey for investors and analysts in a comprehensive yet simple manner. According to our research, companies that effectively position their digital transformations center their communication around:
- Company goals
- Customer-centricity
- Digital technologies/tools
- Case studies
- Partnerships
Intuitively, this model depicts the intended strategic outcomes of the digital transformation (“company goals”), where the focus of the change is (“customer centricity”) and the new capabilities (“digital technologies/tools”), all supported by an overview of the ecosystem, including case studies, partnerships, and customer goals.
- Company Goals: which center on measurable outcomes for the business and anticipated impacts of the digital transformation, both qualitative and quantitative
- Customer Centricity: with an emphasis on customer-led innovation to provide solutions while enhancing the customer experience, including increasing customer lifetime value, reducing cost-to-serve, and fueling organic growth
- Digital Technologies/Tools: with the most common communication focus areas being the use of data analytics, cloud, IoT, artificial intelligence, and cybersecurity
- Case Studies: depicting clear examples of the transformation in action within the company or through customer examples, with a focus on the challenge, solution, and results measured by financial proof points
- Partnerships: showcasing the ecosystem of diverse talent and expertise, including leading customers, universities, research centers, joint ventures, and suppliers
- Customer Goals: directly addressing the common client challenges with solutions enabled by new digital capabilities, including improving time-to-market, lowering costs, improving safety and quality, as well as productivity
- Structure: incorporating a breakdown of the hardware and software components within the new platforms
- Digital Megatrends: depicting how they enable the company transformation while providing new growth opportunities
What Gets Measured, Gets Done…and Gets Investors on Your Journey
Digital transformations can touch every aspect of an organization. As such, establishing reasonable goals and communicating them effectively serve as enablers of success. Our analysis reveals consistencies in the way successful companies communicate their transformation goals. Using both qualitative and quantitative measures, firms portray a landscape of opportunity – from higher margins to patented innovations. The following are top goals communicated when undergoing a digital transformation:
Qualitative Proof Points
90%
Higher Markets
70%
Market Expansion
40%
Lower Costs
40%
Infrastructure Improvements
30%
Pricing Optimization
Quantitative Proof Points
40%
R&D as % of Revenue
40%
Number of R&D/Software Employees
30%
Annual Software Revenue
30%
Annual R&D Spend
30%
Patents
Investors are challenged to both understand and quantify the impact of digital transformations. Successful communicators tell both the story and impact and, while every company will be different, anchoring your transformation in strategic and quantitative milestones will be key to success and buy-in, with the ultimate goal of having your hard work reflected in the share price!
Build the Ecosystem and Make the Benefits Tangible to Understand
In the current race for talent and retention, organizations must get creative with developing an ecosystem that leverages the expertise, diverse thinking, and innovation of people outside the organization.
As noted, the study group communicated their top partnerships as leading customers (50%), universities (30%), research centers (30%), joint venture (10%), and suppliers (10%). These partnerships can extend reach and interoperability, deepen capabilities, disrupt organizations, and access talent/ideas to help drive success.
For investors, measuring the impact of these partnerships is challenging. As such, case studies are a powerful, firsthand approach to making this tangible for the investment community, focusing on the challenge, solution, and results.
In Closing
Digital transformations are multi-year, massive undertakings that need to be communicated in bite-sized bits. Over the years, we have assisted clients in effectively framing and telling their digital transformation stories, resulting in tangible value realization, as what we set out at the onset got delivered on quarter after quarter, year after year.
- Source: McKinsey
- Source: Boston Consulting Group