Observing the slowdown in productivity growth in the 1970s and 1980s, Nobel Prize winner Bob Solow remarked: “You can see the computer age everywhere but in the productivity statistics.” What we observe today is a repeat of what became known as Solow’s Paradox—as investment increases in information technology, worker productivity may fall, not rise. CEOs today are investing a lot of money in technology, but their organizations aren't realizing all the benefits that they could be. In other words, tech adoption is everywhere but value isn’t. Why is that?
All companies today are technology companies. When we talk to our clients, we see that every business, across all industries, is turning to technology-based innovation to disrupt the competitive status quo. And according to our research—the largest study of enterprise systems to date—80 percent of CEOs say they have the right systems in place to innovate at scale.
Except that they don’t. Reduced to its essentials, most companies are making sub-optimal decisions about how to direct their tech investments at five critical junctures. As these less-than-ideal choices add up, they create what we call the “innovation achievement gap”—the difference between the potential and realized value of their efforts.
For CEOs under relentless pressure to transform and grow their companies, it’s frustrating to make significant investments in technology adoption and still come up short. Seventy percent of CEOs believe they are very knowledgeable about their organization’s investments in innovation. And those investments seem sound—they may even be modestly successful. Yet, their companies continue to fall behind competitors. If they stay this course, they run a real risk of failing outright. They need a different path.
Follow the Leaders
We undertook research with an eye to determining what an optimal tech investment path should look like. Our study involved engaging with C-level executives at more than 8,300 companies across 20 industries in 20 countries. Half of these executives were in IT roles, and half were in non-IT roles; 885 were CEOs.
We collected data on the companies’ adoption of certain technologies, those technologies’ penetration (the extent to which they were in use through the company), and the culture changes (for example, changes in mind-set around experimentation and collaboration) that the companies made as they adopted those technologies. We then scored the companies on those three factors, calling the top 10 percent “Leaders,” and the bottom 25 percent “Laggards.” The companies that were in the middle 20 percent became our “Middlers.”
The Leaders stood out markedly; these companies grow revenue at more than two times the rate of the Laggards. As their revenue growth rates continue to increase, the gap between these two groups widens.
In 2018, for example, Laggards left 15 percent their annual revenue on the table. If both Leaders and Laggards continue their current trajectories, the cost of not getting the scale challenge right will be 46 percent of Laggards’ annual revenue in 2023.
Meanwhile, the Middlers grow revenue at more than one-and-a-half times the rate of Laggards. But that’s cold comfort. Leaders still grow more than 50 percent faster than Middlers. Our modeling shows that in 2023, a Middler staying on its current path could end up leaving as much as one-quarter of its annual revenue on the table as unfulfilled potential.
That means a company making US$10 billion in annual revenue in 2015, will have lost US$2 billion in unrealized value by 2018. By 2023, if it doesn’t change its approach, it could lose another US$13 billion.
Taking the right PATHS
We then dug deeper to find out what perspectives, behaviors, and decisions set Leaders apart. The primary differentiator, we found, is the CEO’s view of the purpose and promise of technology investments. They:
- believe more strongly in the need to develop and maintain enterprise-wide “future systems.”
- understand more fully the need for blurred lines in the “technology stack” (data, infrastructure, and applications).
- see more clearly how unravelling tightly integrated systems makes them more flexible.
- understand that by minimizing the differences among processes their company will be better able to leverage all of its data.
- believe more strongly that these elements add up to strategic agility.
Critically, our research also revealed the five key decision points (PATHS) where Leaders keep the CEO’s view in mind to optimize investments:
- Progress: how extensively/broadly should we apply new technology to evolve business processes across the enterprise?
- Adaptation: how can we adapt current IT investments to changing business needs?
- Timing of tech adoption: how can we properly sequence and roadmap deployment of new technology?
- Human+machine workforce: how can we activate and enable the workforce to use and be augmented by technology?
- Strategy: how can we actively align or manage the intersection of business strategy and technology strategy?
At each juncture, Leaders pursue the action that will create a building block for the enterprise-wide “future system” that enables the organization to share and scale innovations repeatedly across business units and processes.
Laggards, by contrast, most often choose the low-hanging fruit that creates siloed systems (and sometimes, they fail to decide at all, letting the status quo prevail). Middlers tend to mix and match, which is also costly, even while it may achieve “good-enough” results over the short term.
Building Future Systems
It’s time for CEOs to match intent with action—or risk falling farther behind as the pace of technological innovation accelerates. Leaders enjoy a considerable head start, and they will not be standing still. The systems they have in place are specifically designed not only to accommodate innovations in technology and its application, but also to create those innovations and to scale them across the enterprise. Yours should, too.
Keen to get started? We have a Future Systems Diagnostic, based on 1.6 million data points from more than 8,300 companies and driven by econometric and decision tree models, which can recommend a custom plan for guiding companies in their evolution for future systems. Get in touch to try it out, or take a look at the full report for more.