The effect of short-termism on digital aspirations

by Vik Sohoni

One of the hallmarks of companies that fail at digital is not thinking boldly enough about the long term. Putting a retrospective on this is evocative. Imagine the owner of a hand-woven textile workshop in the 1700s saying “this Spinning Jenny that mechanizes all the spinning—we have to make our quarter, so we can’t invest in this.” That would have been the end of the Industrial Revolution.

This “crawl-walk-run” mind-set is hobbling many companies today. It is the core of the Innovators’ Dilemma, but directly reflective of the quarterly diet that Wall Street demands of incumbents.

And it threatens to derail many large companies’ very future in the digital economy.

Somesh Khanna, Brian Walsh, and I spoke with several industry participants, analysts, and other observers about this syndrome. Here’s what we found:

  1. Investors understand that digital is a big deal for most companies.
  2. But they don’t know how big, and how to size it. Will it mean a few points of share shift, will it mean a category like payments being disrupted, or will it mean entire institutions or categories of institutions going out of business?
  3. They don’t know what metrics will move, what they should watch for.
  4. As a result, they don’t know how to value investments in digital. Quite literally, what number do they plug into their models?
  5. This is severely constraining management teams from making the right long-term investments. Those that do are pegging them off cost savings, making the case that digital will drive savings (which analysts can track clearly) and oh, by the way, also have strategic, revenue, and experience benefits (which they can’t track as clearly).
  6. Finally, this is in direct contrast to what more nimble companies are able to do with VC money, or as private entities: invest for a longer horizon in key capabilities.

One stark example is that there are very few incumbents that have modernized their technology infrastructure. If there’s anything that holds back speed to market, obscures customer-centricity, and swallows up capex and even opex dollars, it is the imperfect information infrastructure, such as CRMs and ERPs, from years of siloed operations and inorganic growth and the legacy infrastructure that forces releases to be quarterly instead of several times a day, as some digital natives routinely achieve. But the logic of short-termism forces firms to delay DevOps, Cloud migration, or enhancing interoperability expenditures that can be very strategic in their impact. As such, a giant leap forward for many incumbents tends to be upgrading infrastructure to ‘state of the industry’ (i.e. catching up to competitors), while leaders, able to implement a longer-term view, aim for ‘state of the art’.

A direct driver of this is also that investors in many established incumbents aren’t looking to invest in an Amazon-like company. They value steady, unspectacular returns, and odd as it is to say this, predictable profitability. That’s quite the opposite of some of the volatile, high-multiple attackers that have gone public. So many executives feel hamstrung by what’s expected of them versus what they instinctively feel their market is asking for.

Management teams are coming up with a range of answers to this. A handful of executives have bitten the bullet and stated to their investors that they are making the needed investments or are resetting expectations that they will simply be sharing less with investors. Others have used cost savings to justify digital investments but linked those investments quite directly to growth and disruption. Others are using M&A dollars to do what they would have otherwise had to use capex dollars for. And some are using the tailwinds of the current economy to carve out a little bit more for longer-term investments.

In all this short-term pressured thinking, one interesting model that we think can be explored further is partnering with external groups, such as venture capital (VC) firms, to incubate concepts outside the company. In this model, the VC firm and the incumbent create a ‘new co’ that can access the incumbent’s scale to grow their product/technology. Once they have proven this, the new co can offer the same technology to others in noncompetitive contexts (other geographies, other sectors) and fully monetize the investments. This model could provide incumbents a way to access capital without having to fund it fully themselves. The VCs, however, have to step up at a very early stage, albeit mitigated in their risk taking by the availability of scale from the incumbent.

However, over the next two to three years, we expect to see some companies start to create real separation and garner disproportionate market share. At that tipping point, we expect many more players will be ready to start thinking longer term. The problem is, by then it may be too late. It’s a simple learning—you can’t think short-term and expect to win long term.

Vik Sohoni is a senior partner based in our Chicago office.