We are aware that this era calls for your business to be able to continuously adapt to emerging trends. But how? The authors provide concrete data on current realities faced by digital businesses and steps on how to make sure your plans turn into actions.
For decades, digital globalisation – powered by free-flowing data – proceeded increasingly rapidly and seamlessly. But business leaders are waking up to a far more complex and fragmented reality.
Barriers to cross-border flows have been building for some time. In the world of trade, for example, the number of trade-restrictive measures1 in the G20 nations almost quadrupled from 324 in 2010 to 1,263 in 2016. Another area of increasing fragmentation concerns the use of customer data, as more and more countries are legislating to restrict or control the cross-border use of such information.2
These trends have now converged to present a transformed operating environment for global business. Our research reveals that the impact goes beyond risk and compliance issues; the imminent threat is to growth and innovation.
To understand how multinationals view these challenges – and what, if anything, they are doing about them – we conducted a survey in the fall of 2016 of more than 400 CIOs and CTOs at companies whose headquarters were in Brazil, China, Germany, India, Japan, the United Kingdom and the United States. We also conducted several in-depth interviews with CIOs and experts on policy, economics and digital business.
Our research reveals just how seriously this fragmented global context is being taken in board rooms worldwide. But so far, the tangible business implications have not received the attention they deserve across the broader business and analyst community, let alone among business commentators.
The future course of global business is digital. But the increasing obstructions to the flows of data, IT products, IT services and IT talent jeopardise the journey toward global digital business models, a process we call digital fragmentation.
Well over 80% of the executives we surveyed believe their IT strategies and systems are vulnerable to these trends, and they see new digital business models as one of the most exposed areas.
Our research reveals that while many in the digital world are still talking about a new era of seamless data flows, the reality is more complex and disruptive.
Strategic and Operational Worries. Executives do not see digital fragmentation as a minor problem. Consider this startling finding: Nearly three-fourths of those surveyed say that over the next three years, it is likely that their companies will exit a market, delay market-entry plans, or abandon such plans as a result of this new context.
These professionals expect that the fallout from this more fragmented operating environment will force them to make fundamental structural changes in key strategic and operational plans across a broad range of activities and relationships – including global IT architectures (62 percent of respondents), physical IT location strategy (52 percent) and cybersecurity strategy and capabilities (51 percent).
And this is just the beginning. Survey respondents expect the forces driving digital fragmentation to intensify over the next three years, requiring them to further reconsider their global business processes and talent strategies.
Rising Costs and Complexity. What does all this look like on the ground? To put it bluntly, an executive from a major technology multinational told us: “It will be expensive.”
More than 90 percent of respondents expect IT costs to increase over the next three years; two-thirds are feeling the bite now. CIOs and CTOs expect the sourcing of inputs like IT talent to be the most important driver of cost increases as national barriers keep rising.
It will also be costly to meet requirements to duplicate or multiply IT infrastructure like data centres and to comply with multiple national IT standards. “Any restriction on information adds to cost and bureaucracy and slows things down”, noted David Smoley, CIO at pharma giant AstraZeneca.
It also makes the CIO’s life difficult. Fragmentation adds complexity and risk to global IT operations. Take the inevitable increase in bureaucracy. CIOs and CTOs need to remain informed about new and upcoming legislation that will affect their global IT strategy, to stay on top of compliance paperwork in several geographies, and to keep partners, suppliers and customers up-to-date on what could be an avalanche of new requirements and regulations.
But business and IT leaders don’t believe the problem will be limited to challenges to the internal technology function. They see these restrictions spilling over to the ability to generate growth and innovation. Sales, marketing, and research and development all scored high as business functions vulnerable to obstructed global flows. We also probed concerns about digital transformation plans. Respondents put several capabilities that are central to digital growth and innovation at the top of their list, such as customer analysis and tracking systems.
This should come as sobering news to business leaders that see policies on trade, investment, immigration and data purely as risks to cost and compliance, overlooking their impact on digital growth prospects.
Digital fragmentation is already on the boardroom agenda. In fact, it’s a factor in the strategic planning of 80% of the companies we surveyed. That’s a positive development, because digital fragmentation affects every aspect of the business from branding to IT infrastructure to talent. But there’s a strong need now to ensure that planning is turned into action.
We suggest four steps to make that happen:
Add a new lens to strategic planning. Boards must acknowledge the impact of an increasingly fragmented world by designating time exclusively to discussing its implications across the business. They should evaluate whether existing strategic planning techniques – for risk assessment, for example, or contingency planning – can be tailored to deal with the impact. Already, 45% of companies have made the impact of fragmentation part of their board-level scenario planning.
Review and where necessary, reassess all relevant issues. Is the company’s geographic footprint right for the evolving global terrain? Should investments be reallocated differently across markets? For example, key global functions and IT activities may need to be redistributed across different jurisdictions. Redundancy may need to be built into infrastructure plans, such as the global data centre architecture. Just over half of the business leaders we surveyed are reorganising global IT architectures and governance structures. Decamping from less-hospitable markets and relocating IT investments in more open ones is an option being pursued by 42 percent of the survey universe.
Decisions must also be made around where to locate cybersecurity capabilities and where to improve the organisation’s preparedness to respond to new legislation and indeed its ability to influence that legislation. And all these plans must allow enough flexibility to adapt to an unpredictable and evolving environment. Agility will be crucial.
Map and de-risk your data flows. The flows of information needed for key management decisions and business operations – particularly where digital technology is at the core of the business offering – must be protected. Firms must assess how data regulations like national cross-border restrictions will affect their business model and growth plans.
From a data storage perspective, they need to re-evaluate where and how different types of data are maintained, which may demand trade-offs between security and ease of accessibility and use. This includes risk assessments of where data flows that are necessary for key business activities may be interrupted, or where critical data structures may be compromised. This is ultimately an exercise in predicting and preventing disruption.
Build local advantage. Digital fragmentation places new urgency on multinationals to “be genuinely local” in all their markets. The CIOs and CTOs we surveyed are feeling the pressure to localise their IT strategies, processes and infrastructure.
General Electric chairman Jeffrey Immelt captured the rationale in an address last May at the New York University Stern School of Business: “In the future, sustainable growth will require a local capability inside a global footprint. A localisation strategy can’t be shut down by protectionist politics.”
Contrary to the rhetoric of many digital evangelists, national borders do matter, and increasingly so. Key steps to respond to this digital reality: invest in local technology ecosystems and local talent development. Also, cultivate key relationships with local technology partners as well as policymakers. We found that only about half of the companies we surveyed are making such investments so far.
Developing local talent can take time. Many firms such as Cooper Parry are finding other ways to deal with diminished global labour mobility. For example, two-thirds of respondents say they are increasing investments in automation to offset labour restrictions.
Use technology as part of the solution. New and emerging technologies raise new complications in a fragmented operating environment, but they also offer new solutions to succeeding in that environment. A case in point is 3D printing. On one hand, firms must consider different national rules about how data can be stored, used or moved as it moves between the printing/manufacturing location and the designers, customers or other parts of the supply chain. Yet the same technology opens entirely new and flexible options to organise global manufacturing footprints. Similarly, companies will need to rethink their optimal cloud structure or degree of cloud centralisation. These decisions will vary according to how a firm’s value chain and customers are organised around the world.
Companies should also explore how artificial intelligence might help address restrictions on talent migration (via automation or augmentation) or even help corporate administrators to navigate the complex and evolving regulatory rules and legislation in relevant markets. Blockchain is another technology that may offer solutions to a more balkanised technology environment, by providing more secure, decentralised and distributed systems for data protection and cybersecurity risks.
Companies are in uncharted territory after years of following a seemingly predictable digital trajectory. The next phase of digital progress involves a degree of complexity that must be navigated in close concert with other stakeholders, crewmates on a shared journey. Those business leaders that actively engage with their crewmates can help shape the new digital future, rather than responding to its whims. “The best thing we can do,” a senior executive from a global IT giant told us, “is try to sit down in the best and most constructive manner possible to explain to policymakers how this sector is developing and how it affects customers and economies as a whole.” If we’re not part of the solution…
About the Authors
The authors thank Accenture Research colleagues David Light, Eduardo Plastino and Mark Purdy for their contributions to this article, and Roubini ThoughtLab for their collaboration on the survey.