Analysts Discuss Digital Transformation Strategies at Gartner Symposium/ITxpo 2017, October 30-November 2, Gold Coast, Australia
GOLD COAST, Australia, November 1, 2017 — With many options for digital business transformation requiring significant investment, Gartner, Inc. has identified the top 10 ways to fund the shift to digital business.
According to Gartner's 2017 CEO survey,* 42 percent of CEOs are now taking a digital-first approach to business change or taking digital to the core of their enterprise model. To fund digital initiatives, CEOs indicate that the largest bulk of money comes from self-funding, rather than existing budgets, as they see the primary purpose of digital initiatives to win revenue rather than to save costs.
"This should give CIOs pause for thought, given conventional IT management works mostly on the basis of using operating budgets," said Andy Rowsell-Jones, vice president and distinguished analyst at Gartner.
"Transformation requires commitment, leadership, strategy, technology, innovation and importantly, money," Mr. Rowsell-Jones said. "This year and next are likely to be the optimal timing points of overlap between the business cycle and the tide of digital business change. In two years' time, the rising cost of capital could make strategic investment more expensive, and playing digital catch-up is harder."
The top 10 ways to fund the shift to digital business are:
1) Internal self-funding: digital revenue pays
This will only work for short-term projects to gain immediate revenue returns, such as for digital marketing campaigns or price-elevating digital product features. This approach needs clear revenue attribution and is good for continuous, incremental growth, but will not work for disruptive market change.
2) Within existing budgets
It can work for relatively superficial digital business change over two to three years, if budgets are healthy, already generous and need trimming. It is not good for rapid transformation as it might throttle existing business.
3) Investment from reserves
Reserves are the part of profit set aside for internal reinvestment to help the business in tough times, which digital disruption and market loss might fit under. If reserves are healthy, it might accelerate digital transformation with low financial impact on current operations.
4) Increase relevant budgets and cut others
This option requires a very clear understanding of how digital business growth will substitute heritage business slowdown. It is useful if digital business is recognizable and deliverable in the same corporate structure to the same customer base, but not appropriate for adjacency moves or radical industry reinvention.
5) Increase relevant budgets and cut profits
Relevant to deep, multiyear strategic change, requiring clear and careful explanation to investors. It may be easier if a disruptive, threatening competitor makes the transformation need more obvious to all, or for private or family-held companies with long-term planning horizons and fewer owners to convince.
6) New bond or equity capital from investors
If digital transformation requires heavy, multiyear investment, fresh capital may need to be raised. Smaller companies with faster growth rates can raise equity capital from investors by issuing more shares. Larger mature companies with strong reputations can raise debt capital by issuing more corporate bonds.
7) Borrow capital from lenders
Loan capital is typically shorter term, more tactically arranged and helps bridge gaps arising from digital transformation. It is usually only available for conventionally describable, measured risk situations, rather than for speculative entrepreneurial action or situations of industry reinvention.
8) Off balance sheet entries
Another option is to place all or part of the new digital product, service or activity in a separate company shell with investors, benefiting "risky" or "unusual" experiments. This is useful for "farming" digital ecosystems and startups by working with VCs and incubators as co-founders, as well as for industry consortiums.
When digital disruption is serious in an industry, one strategy can be to sell legacy business units early to buyers that are happy to run them in their declining years. The capital receipts from divestitures can then be used to help fund the growing new digital business ventures and revenue streams.
10) Asset disposals
Some assets that were useful in the past but have less relevance in digital business may have a market value to others. Cycling out old physical assets to pay for digital growth can work where "dematerialization" is in play.
More information is available to Gartner clients in the report "2017 CEO Survey: CIOs Must Scale Up Digital Business."
* Gartner conducted a survey of 388 CEOs and senior business leaders in user organizations worldwide in the fourth quarter of 2016 to examine their business issues and some areas of IT technology agenda impact. Most responding organizations were those with annual revenue of $1 billion.
About Gartner Symposium/ITxpo
Gartner Symposium/ITxpo is the world's most important gathering of CIOs and senior IT leaders, uniting a global community of CIOs with the tools and strategies to help them lead the next generation of IT and achieve business outcomes. More than 23,000 CIOs, senior business and IT leaders worldwide will gather for the insights they need to ensure that their IT initiatives are key contributors to, and drivers of, their enterprise's success.
Upcoming dates and locations for Gartner Symposium/ITxpo include:
Gartner, Inc. (NYSE: IT), is the world's leading research and advisory company and a member of the S&P 500. We equip business leaders with indispensable insights, advice and tools to achieve their mission-critical priorities and build the successful organizations of tomorrow.
Our unmatched combination of expert-led, practitioner-sourced and data-driven research steers clients toward the right decisions on the issues that matter most. We're trusted as an objective resource and critical partner by more than 15,000 organizations in more than 100 countries—across all major functions, in every industry and enterprise size.
To learn more about how we help decision makers fuel the future of business, visit www.gartner.com.
Comments or opinions expressed on this blog are those of the individual contributors only, and do not necessarily represent the views of Gartner, Inc. or its management. Readers may copy and redistribute blog postings on other blogs, or otherwise for private, non-commercial or journalistic purposes. This content may not be used for any other purposes in any other formats or media. The content on this blog is provided on an "as-is" basis. Gartner shall not be liable for any damages whatsoever arising out of the content or use of this blog.