Is Economic Uncertainty Delaying Digital Transformation Efforts?
A perfect storm has resulted in a downturn in world economies.
First, there was the COVID-19 pandemic. While the primary threat is over, the pandemic's costs have yet to be paid in full, leaving some economies heavily in debt.
Next came Russia's invasion of Ukraine, which has significantly impacted the global economy and energy prices.
Now inflation is reaching record highs, causing the Central Bank to go into full tightening mode, rising interest rates aggressively in an attempt to tame future price increases. The strategy, the Fed and experts say, will trigger a recession.
And according to the 2022 World Economic Outlook report, it will get worse, with global growth expected to be down to 2.9% in 2023. That's a steep change after 2021's 6.1% growth.
What this means is there is and will continue to be a reduction in household purchasing power for some time, affecting companies' bottom line. And a reduction in sales often means that businesses delay or cancel projects.
In the past five to 10 years, there's been a massive push to speed up digital transformation. So as companies continue to cut expenses across the board to weather the current economic storm, will they do the same for much-needed digitalization investments, or will they seize the day to get ahead of competitors?
Speeding Up Digital Transformation
The move to digitalize companies accelerated in recent years. In 2020, Microsoft noted that while digitalization usually takes about two years to implement, it was being done in two months. It was simple to see why: digital capabilities had become a necessity.
Not only is it now clear, thanks to our modern digital, remote workplace, but a digitally transformed working environment can also help improve corporate culture, according to a 2022 report from Mercer on global talent trends, while making employees more effective in their roles, allowing them to be 'unhooked' from traditional boundaries.
Statista reports that in 2017 and 2018, global digital investments neared $1 trillion. By 2020 and 2021, that figure had jumped to $1.3 and $1.5 trillion, respectively.
The forecast for 2022 varies, with the IDC suggesting it will go as high as $1.8 trillion — another significant jump. While the exact number remains to be seen, there is consensus that it's rising.
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Economic Woes Not Slowing Digitalization Pace
The UK is among those nations deeply affected by the economic events unfolding around the world. Reports show that the G7 nation is already in a recession, and the pound — its local currency — has fallen sharply in recent weeks.
Yet, despite the stifling growth, data shows companies are not halting their digital transformation efforts. However, many statistics show that digital transformation is still on the minds of managers and company leaders in the UK. A study carried out by Public First on behalf of Amazon AWS found that, “over half of UK businesses (53%) agreed that digital technology has become increasingly important over the last five years. [This percentage was higher] when talking to large companies with over 250 employees — of which 89% believe that technology is more important now than it was five years ago.”
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And UK businesses aren't the only ones going full speed ahead on digitalization. Most companies understand by now the level of importance digital technologies have for business continuity, regardless of economic conditions — and perhaps even more so because of economic conditions.
And there are some excellent reasons for this.
- Digital companies typically enjoy improved customer experience. Customers are likely to spend 140% more after a positive experience than customers who experience negative interactions with a brand. Therefore, a small investment in digitalization can have significant rewards for brands.
- Digitalization leads to opportunities for growth and learning. Digital technologies not only improve job satisfaction, it can also improve the overall experience of employees across their work. Yet, only about 5% of companies will initiate a digital transformation for employee engagement, and 10% will start a project to improve the brand's culture.
- Digital transformation improves talent attraction and retention. Recruitment has become one of the most challenging and expensive outlays of businesses. And four out of five companies worldwide report finding it harder to recruit staff today than just a few years ago. This struggle is likely to get worse as more countries enter recession periods and heightened economic uncertainty.
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Investing to Cut Costs and Get Ahead
Companies are in full cost-containment mode at this point. Some are slashing expenses, while others are pausing investments. In a high interest inflationary environment, every penny counts.
Interestingly, research has found that up to 90% of process costs can be reduced by moving to a digital workspace. Companies looking to invest in the short term may therefore reap greater benefits long term. "Now is the time for businesses to increase investments in digital transformation," said Scott Sellers, CEO of Sunnyvale, Calif.-based Azul.
The problem, Sellers said, is having the initial capital to embark on the journey. "Out-of-control cloud costs will prove a massive headwind for many of these initiatives."
Some companies may, indeed, not have the financial resources to invest in large-scale projects like digital transformation. But leaders would be well-advised to weigh the pros and cons in this matter, as a near-sighted approach to this can have damaging repercussions in the future.
Beyond the reality that competitors will outpace companies lagging in their digitalization efforts, employees are also looking for forward-thinking companies offering the best experiences, and customers want to spend their money where they feel valued. Therefore, now is not the time for brands to be holding back on investment but to surge forward and reap the benefits that could potentially see them flourish when growth improves.
"Recessions don't last, but the risk of not optimizing your business for the future can have negative, long-term effects," said John Milburn, CEO at San Francisco-based Clear Skye. "It will be the companies that become more efficient during the downturn that ultimately come out on top."
About the Author
Kaya Ismail is a business software journalist and commentator with years of experience in the CMS industry.