Digital leaders stand out from their competitors in two ways: how they put digital to work, especially in engaging with clients and suppliers, and how intensively their employees use digital tools in every aspect of their daily activities, write Prashant Gandhi, Somesh Khanna, and Sree Ramaswamy in Harvard Business Review.
When business leaders talk about going digital, many are uncertain about what that means beyond buying the latest IT system. Companies do need assets like computers, servers, networks, and software, but those purchases are just the start. Digital leaders stand out from their competitors in two ways: how they put digital to work, especially in engaging with clients and suppliers, and how intensively their employees use digital tools in every aspect of their daily activities.
Recent research from the McKinsey Global Institute (MGI) looked at the state of digitization in sectors across the U.S. economy and found a large and growing gap between sectors, and between companies within those sectors. The most digital companies see outsized growth in productivity and profit margins. But what are the key attributes of a digital leader? And how can companies benchmark themselves against competitors? We looked at 27 indicators that fall into three broad categories: digital assets, digital usage, and digital workers. Our research shows that the latter two categories make the crucial difference.
Digital assets across the entire economy doubled over the past 15 years, as firms invested not just in IT but in digitizing their physical assets. Digital usage in the form of transactions, customer and supplier interactions, and internal business processes, grew almost fivefold—and over the entire period, the leading sectors maintained an enormous lead in usage over everyone else. But the biggest differentiator of all comes from having a digitally empowered workforce. Over the past two decades, the leading sectors’ performance on various digital labor metrics—such as the share of tasks involving digital tools and the number of new digital occupations—rose eightfold, while the rest of the economy barely ran in place.
It is becoming clear that some parts of the economy are playing in an entirely different league. Our research included a new Industry Digitization Index, the first major attempt to measure digital progress and adoption in each sector.
The technology sector comes out on top—no surprise there. Right behind it are media, finance, and professional services, all of which have far more sophisticated digital capabilities than the rest of the economy. On top of these macro-level differences, we see that even lagging sectors may have standout firms that are pushing the frontier forward for everyone else.
Let us look at each of our three broad index categories in turn. First, digital assets. To benchmark them, the index measures how much companies invest in hardware, software, data, and IT services (whether through outright purchases or contracting with third parties to fill in gaps). We also look at the extent to which companies are digitizing their physical assets—that is, whether they have smart buildings, connected vehicle fleets, and big data or IoT systems that get maximum performance out of equipment, systems, and supply chains.
To some extent, digital assets are a story that has been playing out since the 1960s. Retail and financial firms were among the first movers, while today we see mining and manufacturing firms adopting digital technology in a purposeful way, with mobile-enabled tools and IoT-powered devices. One example is Caterpillar’s new S60 smartphone, which comes with built-in thermal imaging capability and is useful for builders, electricians, and utility workers. The focus has also shifted from making long-term capital investments to flexible usage-based operating systems, which explains the rapid growth in cloud-service offerings launched by the likes of Amazon, Google, and Microsoft.
Our second category, digital usage, measures the extent to which companies engage digitally with customers and suppliers. Companies in the leading sectors make more extensive use of digital payments, digital marketing, and design-led product development. They are more likely to use software to manage their back-office operations and customer relationships. They take advantage of e-commerce platforms—and may even operate their own. Their underlying business processes make use of social technologies to interact with customers and partners. Burberry, for example, has set the bar among retailers by seamlessly integrating social media and immersive experiences into its physical stores. These usage-related innovations are likely to have profound implications on business models and economics across the value chain in the coming years.
What really sets the leaders apart, however, is the third category: the degree to which they put digital tools in the hands of their employees to ramp up productivity. To get an accurate picture, we evaluated more than 12,000 detailed task descriptions to identify those associated with digital technologies. We also estimated the share of workers in each sector in technology-related occupations that did not exist 25 years ago and looked at digital spending and assets on a per-worker basis.
The gaps are huge: companies in leading sectors have workforces that are 13 times more digitally engaged than the rest of the economy. In lagging sectors, the digital engagement of the workforce can be erratic; some organizations have made progress in certain areas but have not yet addressed foundational tasks their workers perform. Many health care organizations, for instance, use incredibly sophisticated technology in diagnostics and treatment but substantial parts of their workforce use only rudimentary or no technology. Fewer than 20% of payments to health care providers and their suppliers are done digitally, for example.
The striking gaps in digital labor at the sector level, revealed by the Industry Digital Index, are playing out every day at the company level as well. Technology still hasn’t penetrated much of the everyday work performed by many Americans, which means that most businesses are missing opportunities for greater efficiency and better customer experience. Many still need to break out of their old habit of housing “digital talent” in a separate department. Companies increasingly need each employee to bring greater digital skills to bear on every activity. That’s the only way to unleash innovation and capture efficiencies at an institutional level. In some cases, new hires may be necessary, but investing in ongoing employee capability building and cultural change could pay real dividends.
For executives, the first step is to identify digital priorities, keeping in mind the overall business transformation needed to maintain a competitive advantage. This requires a renewed external focus to understand more deeply how peers in the industry are digitizing, how customer expectations are changing, and which companies from within or outside the industry can best meet those expectations. Once the gaps are identified, management teams can design strategies to deliver near-term financial impact while starting the process of renewing the digital core. Such a renewal is only possible when leaders take a holistic approach to their companies’ digital assets, usage, and labor.
This article originally ran in Harvard Business Review.