United States

The choice: transition or transformation

Are businesses just keeping up—or are they moving ahead?

ARTICLE

In 1965, Gordon Moore, co-founder of Intel Corporation, observed that the number of transistors in a dense integrated circuit doubles about every two years. Since then, Moore’s Law, as the observation came to be known, seems an almost quaint—if not a conservative—estimate. That the speed and capability of computers can be expected to double every two years is now a given. What we do with the technology is less assured.

Nine of 10 executives polled in the RSM US Middle Market Business Index (MMBI) believe their organization’s capital investments and expenditures sufficient to meet current demand, raising concern that this view may reflect growing complacency. When it comes to business-level decisions on capital expenditures, perhaps the question that needs to be asked is: Are middle market businesses making only transitional decisions, or more thoughtful transformational ones to facilitate the ability to anticipate, adapt and drive downstream demand going forward?

How companies answer depends on their unique circumstances. In the MMBI survey, many participants noted that they were already investing in technology. These executives appear to understand that expanding or investing in technology is a strategy focused on long-term interests rather than short-term gain. Bill Kracunas, RSM US’s national management consulting leader, observes: “Every client I know is going through a digital transformation in every department.”

"Expanding or investing in technology is a strategy focused on long-term interests rather than short-term gain."

What will be the tipping point for those companies still on the fence? Will a forcing mechanism challenge and eventually persuade them to innovate? A number of issues could change the way these businesses operate:

Regulations:

Keeping track of a changing tax environment can be difficult, particularly when a company has operations or sales in various states. With the 2018 Wayfair decision, the U.S. Supreme Court opened up the possibility for states to impose sales and use tax collection and remittance responsibilities on remote sellers based solely upon their economic presence in a state. Middle market companies should speak to their state tax advisors about the impact of Wayfair on their business. The implications for industries go well beyond retailers: Those companies that sell for resale or sell component parts for further processing are likely to see a significant increase in sales tax compliance obligations requiring additional time and expertise. The cost of the taxes may pale in comparison to the new technologies companies need to be able to comply with Wayfair. Moreover, companies may be unaware that their business activities with remote vendors may be creating nexus in some locations, allowing states to impose various state taxes. A robust, enterprise-wide technology platform would go a long way toward identifying exposure and ensuring compliance.

Labor:

Sustained levels of low U.S. unemployment make it difficult to attract and retain qualified workers, let alone keep up with demand for products and services. Companies need to take a range of actions to maintain and improve production, including investment in automation. “In an environment where qualified labor is becoming scarcer and more expensive, now appears to be an ideal time to make technology investments,” notes RSM US Chief Economist Joe Brusuelas. For some manufacturers of robotic equipment, business is good. But it will take a different mindset—and perhaps an updated business model—for some companies to incorporate innovative technology into their operations. “Data entry is starting to disappear; for employees, it's becoming data analysis,” Kracunas says. “I think the work will be different and, if anything, I think digital transformation will actually create more work.” But training and technology investment will be mandatory. In their book The Second Machine Age, authors Erik Brynjolfsson and Andrew McAfee point out that “there’s never been a worse time to be a worker with only ‘ordinary’ skills and abilities to offer, because computers, robots and other digital technologies are acquiring these skills and abilities at an extraordinary rate.”

Cybersecurity:

The age of big data translates to even bigger risk for businesses of all sizes, but middle market companies are particularly vulnerable. Compared to just three years ago, significantly more middle market companies (13 percent versus 5 percent) contend they experienced data breaches, as noted in the RSM US Middle Market Business Index special report on cybersecurity. There is no one-size-fits-all approach to developing and implementing security controls to protect against incidents. But a sound cybersecurity management program—one that is supported by technology that protects, detects and corrects systems against any unauthorized access—is a business imperative. Too much is at stake to put a company’s resources and reputation at risk by leaving systems and data vulnerable to cyberattacks.

Competition:

In an increasingly competitive environment, innovation is a key differentiator for successful businesses and a significant driver of industry disruption. Retailers, for example, are investing in digital business transformation and IT modernization to enhance the consumer experience, and investments in the so-called internet of things, which connects everyday devices to technology, are expected to increase as well.

Industry:

According to Gartner, the retail industry saw its highest growth in IT spending in 2017 in the industry’s efforts to engage consumers. Consumer-facing business functions are also behind the increased spending in machine-derived intelligence by the banking and securities industry, which is the No. 1 industry worldwide in IT spending. Manufacturing and natural resources are second; communications, media and services came in third. Governmental regulations and investments in analytics also are driving the growth IT spending in health care. The private real estate sector will continue to use technology to analyze data and make informed decisions on where to build and invest.

Aging infrastructure:

All technology reaches a point where it simply becomes more of a hindrance than a benefit. Older technology will eventually lose support from vendors, and as those platforms become less efficient, new solutions can provide a significant boost in productivity. When technology reaches end of life, it offers a critical opportunity for management executives to think about how they can gain an advantage over their competition. The objective is not only to replace what is at end of life, but to implement solutions that enable the company to leapfrog competitors that may still be using a suboptimal solution.

"In many cases, organizations already own technologies that are not being used to their full potential."

Pragmatic innovation

Many organizations automatically equate technology advances with large investments, but taking steps toward digital transformation does not always carry a huge expense. For example, companies can leverage social media platforms to create groups that can gather unfiltered, targeted insights directly from customers or employees.

“It’s getting harder and harder to find areas where technology doesn't apply,” observes Jeff Johannesen, RSM US’s chief strategy and innovation officer. “Successful businesses are always thinking about what's next. As soon as you get complacent, you're at greater risk.”

“So even if you're shoring up your balance sheet, or you're giving back to your shareholders—and there are good reasons to be doing that—you will want to incorporate more tech as well,” he says.

A pragmatic approach to innovation can successfully identify transformational opportunities with a manageable financial commitment, a strategy that may be more attractive and workable for middle market companies. Organizations can implement several initiatives to increase innovation and enhance processes in a pragmatic manner, taking improvement actions that almost every company can implement. “In many cases, organizations already own technologies that are not being used to their full potential,” says Brusuelas.

As technology advances, many solutions are becoming more affordable for businesses of all sizes. For example, cloud computing has greatly reduced the upfront costs for implementing several applications that can greatly enhance key business processes.

Innovation stems from not just small, incremental improvements; rather, it requires significant changes that bring immediate differences to key stakeholders. Businesses must assess their technology frameworks and solutions regularly to provide clear value to internal and external customers. In any case, technology investment is becoming a business imperative. “The integration of advanced technology—big data, artificial intelligence and machine learning—is rapidly altering the nature and type of capital expenditures necessary to remain competitive,” says Brusuelas.

The window of opportunity provided by the TCJA is open for a limited time, and middle market companies would do well to take advantage of the capital investment opportunities it provides. Even if technology is not a primary concern, it should be a part of any strategic business plan. Leading companies know it is no longer enough to simply maintain the technological status quo.

“Business owners are very thoughtful. A lot of middle market companies are still trying to figure out how to be more innovative and how to take advantage of technology in their business,” says Johannesen.

“It's a little bit like a hockey stick. It goes along and slowly trends upward. The early adopters go for it and they either prove or disprove the technology for everybody else. Then, all of a sudden, things come together and adoption shoots up at a very accelerated pace.”

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