Unleashing digital value for cloud leaders

A blog post by Diana Kearns-Manolatos, senior manager, Center for Integrated Research, Deloitte Services LP; Tim Smith, principal, Tech Strategy & Business Transformation leader, US Monitor Deloitte; Tim Bottke, partner, sector lead, Telecommunication, Media & Entertainment, Deloitte Consulting; and Gregory Dost, principal, Strategy and Analytics, Cross Industry, Deloitte Consulting.

Most companies across the globe consider digital transformation initiatives as the cornerstone to accelerate change and maximize returns. But, most often, these companies struggle to find which actions help in creating value and which may impede it. How do investments in specific digital transformation—of which cloud strategies are integral—help or hurt enterprise value?

To arrive at a conclusion, Deloitte analyzed 10 years of financial disclosures gathered from 4,651 organizations to ascertain how three distinct digital transformation actions affect enterprise value as measured by market capitalization. The Deloitte research, “Unleashing value from digital transformation: Paths and pitfalls,” found that by combining three specific drivers—digital strategy, tech aligned to strategy, and digital change capability—organizations can increase market capitalization by as much as $1.25 trillion among Fortune 500 companies alone.

Three individual actions that drive market value gains—and losses 

Importantly, digital transformation and cloud strategy leaders have a role to play related to all three of these actions. 

• Digital strategy is defined as the enterprise objectives that are supported by digital transformation and digitization initiatives. This cluster might include strategies related to new business capabilities, entry into new markets, and development of new products enabled by digital initiatives in the broadest terms. Digital strategy is technology agnostic and shows an intent to align the broader digital transformation program with larger enterprise goals across the organization, business unit, product lines, and more.
  

An example of this action might be a Life Sciences business discussing its intention to use its digital ecosystem to enable research and development (R&D) strategies related to the creation of new drugs, treatments, therapies and more. The Deloitte research showed that only about 44% of organizations have a digital strategy that they intentionally discussed in their filings. 

• Technology aligned to strategy is defined as the technology domains that come with digital transformation and to what extent organizations are intentionally aligning them with their enterprise strategy. This cluster focuses on organizations’ investments in the individual technologies we’ve come to associate with digital transformation: AI and machine learning, cloud, cybersecurity, digital reality, IoT, blockchain, quantum computing, and many more.

An example of this action might be a Banking and Capital Markets organization discussing how it plans to use cloud-native capabilities to launch a new banking product application to reinforce its open banking strategy. Here, business leaders have clearly expressed how their cloud investments are connected to a larger strategic objective that is meant to drive new product capabilities and revenue growth. The Deloitte research showed that only about 34% of organizations have their technology investments aligned with their enterprise strategy and have communicated that alignment back to shareholders. 

For cloud leaders, there is a clear opportunity for business and technology leaders to work more closely in developing technology investment strategies and implementation strategies that are more integrated and intentional in supporting enterprise objectives. Done right, the research shows that this action can lead to double the market value that an organization sees compared with digital strategy alone.

• Digital change capability is defined as an organization’s ability to adapt to and adopt new processes, resources, and ways of working in support of its broad digital initiatives. This cluster refers to organizations focused on the more qualitative human characteristics and organizational changes necessary for a transformation, encapsulating talent, skills, culture, agility, nimbleness, operating efficiency or processes, capacity for new ideas, crowdsourcing, and engineering.

An example of this action might be an Energy organization focused on workforce transformation and digital upskilling to enable digital transformation initiatives broadly. While having a strong digital change capability can be critical to engineering advantage from technology implementations under the right circumstances, it can be a double-edged sword if not connected with a strong technology strategy—especially for ER&I companies, given their strong operational focus.

In fact, when observed in isolation across industries, our research showed organizations with only a digital change capability saw three times less market cap than those with only a digital strategy. In other words, digital change capability without one of the other actions presents a value erosion risk. Which brings us to another point: What happens when you combine these actions? 

The most positive and most negative market value combinations related to these actions 

The analysis revealed that combining all three actions can unlock the maximum value. The trifecta of a well-articulated digital strategy, technology investments aligned to the strategy, and a digital change capability in the form of mobilized organizations ready to manage change can result in as much as $1.25 trillion in additional market cap for Fortune 500 firms. An example might be a major Retail organization investing in cloud machine learning services to enable new checkout capabilities that would eliminate customer wait times and enable its workforce to support increased demand for pickup and delivery services.

That said, the analysis revealed that change capability is the wild card; its presence can make or break value for the enterprise. On its own, it’s a value eroder as we noted earlier. As part of the trifecta, it’s a value catalyst. But when it’s absent, companies saw the worst outcome of all. Digital strategy and technology aligned to strategy without that critical focus on digital change related to humans, adoption of Agile principles, or integration of a strong software engineering culture result in a significant erosion of enterprise value. The losses are 10 times greater than those seen with the other value destroyer—digital change—on its own and can be as much as a $1.5 trillion market value loss risk among Fortune 500 companies. To maximize the positive returns, organizations must make sure they have the change capability to accompany their digital transformation efforts. Properly applied, this can turn the most negative scenario into the most positive one.

Succeeding with digital transformation and cloud innovation

For companies to realize gains, they need to use the digital transformation trifecta and build their overall plan hinged on four action points:

• Be deliberate: Taking deliberate action and understanding how these three factors are mutually enabling is key to producing higher investment returns.
• Communicate with purpose: Companies need to link their technology investments to their strategy and be able to explain the relationship between the two.  
• Get close to the technology so you can get specific: It is important to take the time and invest in relationships that allow a deep understanding of how the technology works, why it matters, and how it is architected.  
• Prepare, prepare, prepare: Companies need to focus on building change capabilities, including the right skill sets, culture, and agility.

Though it is easier said than done, digital transformation is an ongoing journey and needs to have in place a well-intentioned strategy, investing in technology to power strategic initiatives and creating an organizational culture that can adapt and change. Together, organizations stand to achieve greater success and value from their cloud strategies and investments.

For more on this topic, read Deloitte’s research, “Unleashing value from digital transformation: Paths and pitfalls.”