Digital transformation and artificial intelligence are terms that have become common parlance in business circles over the past few years. These and other closely associated buzzwords, such as ChatGPT, are not just dominating conversations, but are influencing the strategies of top companies and have even boosted tech stocks around the world.

The foray into the digital paradigm, summed up in the ubiquitous phrase of the “fourth industrial revolution”, has been different for firms depending on where they are in their lifecycles. Incumbent firms have embraced the digital era differently when compared to the challenger firms that trace their genesis to a digital platform. Further to this, the approach to digital transformation will differ by industry and sector – banks will have different digital objectives compared to a chain of nail bars, for example.

So how can incumbent firms make decisions to adapt in an era where digital advancements have affected their business models, business processes and the way they engage with their customers? Let’s try to answer the question without the usual hype and the buzzwords.

Firms that have been operating for a while have generally accumulated a level of digital and leadership capabilities for digital activities. Banks, for example, have adopted automation for decades to control costs, improve processes and remain compliant with onerous regulatory requirements. 

Get Focus insights straight to your inbox

Sending...

Please complete all required fields before sending.

Thank you

We look forward to sharing out of the ordinary insights with you

Sorry there seems to be a technical issue

 

The pace of embrace

What has changed in recent years has been the importance of digital transformation as a key component of business strategy and the recognition of the urgent need to generate both digital and leadership capabilities to thrive in this new world. The pace of embrace, as I like to call it, of digital transformation by incumbents will in part be determined by their vision. They will either want to lead their industry in digital transformation, hoping to generate significant competitive advantages, or look to follow at a close distance, to ensure their relevance while avoiding the risks associated with new technologies.

One of the first mindset shifts that incumbents will have to make is to think of digital strategy as a business strategy and not just another problem for the “techies” to solve. Technology, while a key enabler, is not the be-all and end-all of digital transformation. I would argue that it is more about transforming people, their attitudes and mindsets, to help them to reimagine their businesses in a digital context.

Executive leadership usually provides a blueprint for developing digital and leadership capabilities for digital transformation and will invite the rest of the firm to build it up.

Incumbents that extract significant profits from exploiting digital technologies have realised the importance of their business leaders – the decision makers – acquiring digital knowledge to add value to their solutions, as well as IT leaders becoming familiar with business models to directly influence business strategy. Ideally, every employee will be engaged in the firm’s digital transformation journey, which often requires an intentional, firm-wide approach to learning about the subject.

 

How do firms pragmatically decide to invest in new technologies?

Firms will typically evaluate the state of their current technology or digital environment concerning their vision. Gaps might be addressed by reorganising combinations of existing resources and capabilities or repurposing them. Where there isn’t a readily available solution, they will often prioritise investments into new technologies based on business cases that show calculable returns.

The potential flaw with this approach is that digital business models or elements of it are often novel, and the returns are conceptual rather than predictable, which appeals more to instinct than forecasts.

On the flip side, the risks from new technologies are real and might lead to significant economic losses and potential threats to society like we have seen with AI reinforcing stereotypes and invasion of privacy. A balanced approach can be achieved by having informed leaders, using prototyping, and taking advantage of software-as-a-service models to avoid huge upfront capital outlays that mitigate against potential catastrophic economic losses.

Consumption models and managed services are gaining in popularity in the technology domain. They allow smaller incumbents and start-ups to compete head-on with their larger competitors by democratising access to the latest and best technologies through affordable and flexible structures. Outsourcing services, partnering with experts and using off-the-shelf solutions can be cost-effective and improve the speed-to-market of new initiatives while not overhauling a firm’s budgeting philosophy.

Costs and the decision-making process

Costs are a key consideration in the decision-making process and executives will often need to balance investments in new technologies with their commitments to shareholders. In addition, they have to prioritise investments in technologies related to regulatory requirements, protecting their cyber networks and replacing core technologies that are becoming obsolete. The reality for most firms is that these priorities will typically precede any investment in technology for new business initiatives.

Incumbents wishing to take advantage of opportunities today and in the future will be faced with decisions to adopt technologies such as artificial intelligence, big data, and the blockchain. Their vision, strategy, quality of leadership and people, culture and governance will influence their decision-making and ultimately their competitiveness.

Funding of digital and technology procurement is a potential game changer in the decision-making process. It can bring forward the horizon for new or improved business models, business processes and customer engagement channels.

Jared Pillay
Jared Pillay, Technology Asset Finance, Investec

Funding of digital and technology procurement is a potential game changer in the decision-making process. It can bring forward the horizon for new or improved business models, business processes and customer engagement channels.

With the proliferation of managed services contracts in the technology procurement landscape, we at Investec are seeing a greater need from systems integrators and buyers to fund the associated capital costs. Talk to us about funding your technology sale or purchase if you are a global or local OEM or distributor and if you are a local systems integrator or buyer. We look forward to chatting.