“Digital transformation” is my nomination for this year’s No. 1 buzz phrase. But how do you — and your clients — pay for it? That’s the big question.
To be fair, “digital transformation” is a popular phrase for good reason. Nearly every organization is watching its industry be transformed by the digital technologies we know and love.
You can see how IT is disrupting and overturning industries including retail (think Amazon), finance (FinTechs and robo-advisors) and transportation (Uber, Lyft, et al.). In these and other industries, managers at older companies realize they must invest big-time in transformative IT. Otherwise, they risk becoming the digital highway’s newest roadkill.
Do you have clients in this situation? If so, they need a digital transformation. But how will they pay for it?
A new survey of corporate CEOs has answers.
The survey says
The survey was conducted by Gartner, the well-respected research and advisory firm. It reached nearly 390 CEOs and senior business leaders worldwide during last year’s Q4. So the recently released results are still fresh.
Among the survey’s findings: 42% of CEOs say they’re taking a “digital-first” approach to changes in their business. Many also say that the primary goal of digital transformation should not be cutting costs, but increasing revenue.
Therefore, the CEOs continue, digital transformation projects can be self-funding. The money doesn’t need to come from operational budgets, as is traditionally done.
Fair enough, but self-funding projects take time. Where should the initial funding come from?
10 steps to funding
Helpfully, Gartner reviewed the results of its CEO survey and pulled out the 10 top ways to fund digital transformation projects:
> Internal self-funding: Short-term projects that deliver immediate returns can pretty much pay for themselves. For example, a digital marketing campaign.
> Use existing budgets: Yes, it’s still an option, Gartner says, but only when budgets are already generous, healthy and need trimming. Hmm, how often is that among SMBs?
> Invest from reserves: Smart profitable companies set aside funds for a rainy day. If your client has a deep reserve, it can dip into them to pay for new digital projects.
> Adjust budgets: Raising some budgets while cutting others can free up funds. Gartner says this works best when offering new services to old customers.
> Raise budgets, cut profits: This one's for multiyear projects, and it requires clear communication with normally impatient investors. For this reason, Gartner says it's an approach well-suited for family-owned businesses.
> Investors: For heavy, multiyear investments, a company can raise funds by selling bonds or shares to investors. It means giving up some control, though.
> Lenders: Loan capital is doable, especially when your client can define the project’s goals, risk and likely ROI. But it’s not a good option if your client is shooting for something as radical as industrial reinvention.
> Go off-balance sheet: A bit more sophisticated, this approach involves setting up a shell company for especially risky projects. This can then attract funding from VC firms, incubators and industry consortiums.
> Divest: Your client actually sells one or more entire legacy operations, then invests the gains in new, digital operations. One for the gamblers.
> Asset disposal: Similar to divesting, this involves selling not entire operations, but only assets that have become irrelevant to your digital business. Gartner calls it “cycling out old physical assets.”
To be sure, not all of these approaches will work for smaller companies. But now when your clients ask, “How the heck are we going to pay for digital transformation?” you can tell them what other CEOs are doing.