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‘Digital laggards’ must harness data or get left behind

Clint Boulton | Sept. 22, 2016
Digital leaders post higher gross margins, revenues and profits than digital laggards, according to new research from a Harvard Business School professor. Data is a big reason why.

Consultants like to warn CIOs that if they don't embrace modern technologies to meet customer demands that they will be left in the dust by more nimble rivals. Such sky-is-falling proclamations have been taken lightly because they've been difficult to back up. However, new research from Harvard Business School (HBS) professor Marco Iansiti and Keystone Strategy suggests that a divide is forming between organizations that have accelerated their digital transformations and those that are still figuring out a working digital model.

Digital leaders, defined in the report as companies that landed in the top quarter of its research, generate better gross margins as well as better earnings and net income than organizations in the bottom digital quarter. Leaders post a three-year average gross margin of 55 percent, compared to just 37 percent for the laggards. Leaders also outstrip laggards in three-year average earnings 16 percent to 11 percent. And in three-year average net income, leaders have the advantage 11 percent to seven percent.

"It's a pretty substantial gap and it correlates with performance in significance ways," says Iansiti, a professor of business administration at HBS, who collected his research from more than 300 senior business and technology decision makers from large enterprises. "The bad news is that it's not going to go away so this is a call to action to go out there and do something about this."

Digital is disrupting the business

Digital technologies are increasingly weaving their way through society’s fabric. Smartphones, tablets and, increasingly, wearable deviceshave replaced or complemented laptops for many people. Everyday machines equipped with sensors and IP addresses are throwing off data to devices, which are listening and reacting. Chat bots are augmenting order placement at chains such as Taco Bell and Dominos Pizza.

CIOs have blanketed such efforts under the phrase "digital transformation" over the past two years. The report, which included input from retail, manufacturing, financial services and consumer packaged goods companies, suggests that researchers are starting to ask the hard yet valid questions about how these efforts are paying off. “Digital transformation has become the new normal,” Iansiti says.

While some enterprises, such as General Electric, Ford and Burberry are spending billions of dollars to facilitate technology, operational and cultural changes, others have lagged behind, says Iansiti. "Our research shows that a substantial performance gap is opening between digital leaders and laggards, effectively creating a “digital divide” across companies," says Iansiti.

CIOs may be tempted to argue that digital leaders boast bigger budgets than their laggard counterparts, but Iansiti quashed this notion. The highest performing companies have technology budgets on par with digital laggards, with average IT spending as a percentage of revenue at 3.5 percent, compared to 3.2 percent for their counterparts.

 

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