Designing a digital transformation road map
5 key considerations for the middle market
As technology revolutionizes the traditional business model, middle-market leaders are evaluating emerging innovations that harness the power of automation and networking to transform manual, paper-based processes into instantaneous online functions. This movement, known as digitization, and often referred to as part of a larger strategy of digital transformation, centers on tools that can achieve operational gains, improve employee efficiency, drive stronger customer and partner relationships, and boost the bottom line.
The pursuit and embrace of revolutionary gains in efficiency and automation have long been cornerstones of business success. The ability to keep up with the rapid and sometimes disruptive pace of change often determines the degree to which an organization both thrives and ensures its relevance into the future. Nowhere is this more important than in the middle market, where companies must compete against similarly-sized counterparts, but also against larger enterprises able to fully leverage economies of scale (and often deep financial resources) and smaller industry players capable of the nimblest of operations.
To meet these challenges, many in the middle market are looking to digital transformation strategies that maximize the use of technology across the enterprise. These help ensure that both back-office and, increasingly, front-line functions operate at peak efficiency, leveraging technology gains to achieve competitive advantage and maximize organizational value. Yet it should go without saying that the shift toward a fully digitized and automated environment must be approached with careful consideration to ensure long-term sustainability, full-scale user adoption and maximum return on investment (ROI).
We offer the following five initiatives as building blocks to a successful—and profitable—middle-market digital transformation strategy:
1. Making the case: Securing and prioritizing support for digital transformation
As middle-market companies increase their technology spend in favor of more robust digital tools, it is important to evaluate how such budgets are allocated, requiring organizations to examine specific areas that could benefit from the faster, more streamlined capabilities digitization offers. The universal law of cause and effect—the more you put in, the more you get out—applies here, as companies that place a high priority on digital investment typically experience the greatest return on digitization projects.
In fact, a recent survey of 500 C-level middle market executives conducted by the National Center for the Middle Market (NCMM) found that 49 percent of companies growing at an annual rate of 10 percent or more consider themselves digitally advanced, versus 36 percent of the sector as a whole.1
2. From back-office to front line: Extending technological reach and influence
Digitization presents immediate advantages for traditional back-office functions such as finance and accounting, replacing stacks of paperwork with instant, computer-based automation. However, leading middle market firms are also applying digitization capabilities to front-line areas, such as business analytics and strategy development, designed to fuel future revenue and growth.
While the NCMM survey identified that 19 percent of middle market companies currently allocate their digitization spend to these forward-facing functions, a substantial number also plan to increase such spending in the future. For example, 42 percent of companies anticipate increasing or significantly increasing their budgets toward business analytics and strategy development, and 39 percent expect to increase it for innovation projects.2
3. Connecting the dots: Bridging individual successes with organizational strategy
While the NCMM notes that nearly 90 percent of companies state their latest digitization project succeeded, surveyed firms rate their overall “Digital Grade Point Average” as a 2.8 on a scale of 0-4, the equivalent of a C+.3 Such disproportionate optimism may be attributed to the fact that a full-scale, organization-wide strategy will almost certainly require more resources and a longer time horizon to execute than individual efforts, rendering the longer-term initiatives difficult to maintain.
The process of migrating away from legacy systems, building up internal expertise and garnering strong executive support can be complex, and it can take up to three years before a middle market company sees a return on its digital investment. One way to quicken this pace is to ensure that all individual efforts are designed to tie directly back into the overall organizational vision for digital growth and transformation.
4. The math and metrics: Understanding, calculating and articulating the ROI
Fully communicating the concept of digital transformation requires translating the term into a more concrete, quantifiable standard, against which departments across the enterprise can measure progress and success. By calculating ROI for all digitization projects and sharing these insights with team members, executives can more accurately detail how such efforts are contributing to the company’s growth, and are better positioned to make future forecasts and budget decisions.
Converting nomenclature to numbers also helps middle market firms see how they compare against others in their space. The NCMM cites the average middle market ROI for digital transformation is nearly 28 percent, whereas middle market “high-spenders,” who allocate 10 percent or more of their revenue annually on digitization and transformation initiatives, see ROI of up to 39 percent.4
5. Putting it to work: Attracting and retaining talent for digital transformation
The success of any middle market digital transformation plan hinges on the ability of an organization’s workforce to implement it to full capacity. According to the NCMM survey, 65 percent of firms cite staffing and talent as an obstacle, and 55 percent admit to a lack of knowledge around the best tools for the job. Yet, even with these hurdles, they only allocate an average of 32 percent of the total digitization budget to outside consultants and experts, focusing a majority of spending on internal resources.5
Plans for digital transformation should strategically address talent retention, with steps in place to either expand the skill sets of existing employees, or to target experienced consultants and technology resources to speed and optimize the digitization process.
Digital technology presents an unparalleled opportunity for middle market leaders to expand and optimize their production capabilities for sustainable growth. Moving forward, successful firms in the middle market will be those who approach the movement with a strategic vision for operational application, leveraging available tools to help them thrive—and transform—into the future.
1 “How Digital Are You? Middle Market Digitization Trends and How Your Firm Measures Up,” National Center for the Middle Market, The Ohio State University, 2015, 12.
2 Ibid., 5.
5 Ibid., 18.