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Digital transformation and the middle market
October 4, 2023
Authored by RSM Canada LLP
Joel A. Humphrey, CPA, CA shared this article
RESEARCH | October 04, 2023
Technology is evolving, fast-paced and changing how companies do business. Artificial intelligence has the attention of company leaders, and cybersecurity concerns are driving investments in technology, according to data from the second-quarter RSM US Middle Market Business Index survey, which polled executives from April 3–24, 2023.
The survey reveals that for company leaders, digital transformation is more than just upgrades or new platforms. Digital transformation can alter an organization’s trajectory and affect whether the company succeeds or fails.
A few of the report’s key findings:
Inside the report
The report provides insights into how middle market businesses are addressing digital transformation, including the following:
- What types of companies are investing in digital transformation?
- How are businesses dealing with the tight labor market for information technology talent?
- What is the role of leadership when it comes to digital transformation?
- How do companies measure progress?
- What is the future of digital transformation?
Read RSM’s special report to learn more.
Middle market approach to digital transformation still coming into focus
Midsize companies are taking digital transformation seriously, but their results often vary, according to data from the second-quarter RSM US Middle Market Business Index survey. The survey found that companies are investing more in information technology, and that interest in the business use of artificial intelligence (AI) is growing. However, companies are not always clear about how to achieve their digital transformation goals.
Digital transformation—the use of technology to fundamentally change how a company operates and delivers value to its stakeholders—relies on a comprehensive, strategic approach to adopting tech solutions. Businesses focus on digital transformation to improve efficiency, increase productivity and enhance employee satisfaction. The process can affect all areas of a business, including its products and services, customer interactions, internal operations and organizational culture.
For the survey, the Harris Poll recruited middle market executives from a broad range of industries and sectors. Interviews were conducted from April 3 to April 24, 2023, with 404 senior executives completing the survey. This special MMBI report details some of the survey’s most important findings.
Companies are investing more
The middle market is focused on digital transformation. Over three-quarters (77%) of all survey respondents said they plan to increase their information technology (IT) budgets in 2024. A similar percentage (74%) said digital transformation was the most important area or among the most important areas of investment for their companies.
Creating a digital strategy is essential for businesses, says Rhys Morgan, an RSM US LLP management consulting partner, digital transformation.
“At its core, digital transformation isn’t new,” Morgan says. “It is a combination of traditional information technology with an end-user or consumer impact. Digital transformation’s ultimate goal is to make it easier for a company to do business.”
Organizations may have multiple reasons for embracing digital transformation. However, one-quarter (25%) of all respondents said the main reason for investing more in digital transformation and IT is to drive business productivity, making this the top motivation for companies.
"Digital transformation is a success if it reduces redundant processes and manual work. It should eliminate the repetition of tasks, improve the ability to use robotic processes and automation, and pick up economies of scale."
Executive, Construction industry
Improving productivity through digital transformation can take the form of enhanced automation or streamlined procedures. In addition, companies that embrace digital transformation often improve the quality and accessibility of their data, leading to more productive innovations and decisions.
Furthermore, digital transformation can foster increased communication and collaboration among team members, regardless of physical location, enhancing productivity. Regarding this crucial point, companies are interested in the human side of digital transformation: 22% of respondents said improving the customer experience was an important reason for investing in digital transformation. By comparison, 19% said enabling employees to be as connected and engaged as possible was primary.
David Hickethier, principal of RSM’s human-centered design practice, says these goals are interrelated.
“Digital transformation’s impact on the employee experience drives a successful customer experience,” Hickethier says. “Organizations often start with features, functionality and upgrading, and then they tell employees, ‘Hey, we've got new technology, so learn to use it.’ But it’s better to start by understanding the challenges and opportunities from an employee perspective because this will ultimately improve the customer experience.”
An ongoing journey
Over half (52%) of all respondents have a clear and agreed-upon digital strategy that addresses their IT and digital transformation goals. But while one-third (33%) of all respondents have plenty of digital activities underway, they have not formalized their approach into a digital strategy.
Matt Kenney, RSM principal and business applications service line leader, says that company leaders may want to focus on the advantages that digital transformation can provide.
“The more an organization transfers a broad set of business data into a single application, the more useful that data becomes,” says Kenney, who notes that enterprise resource planning (ERP) and customer relationship management (CRM) upgrades come up frequently because a single system can link data to other data, making it more useful and helping businesses gain efficiencies.
Tackling a project as complex and ongoing as digital transformation requires company leaders to identify issues, forecast future conditions and commit to an ever-evolving journey. Some leaders may have difficulty fulfilling all those demands. Almost one-quarter (23%) of all respondents said insufficient executive team support is a challenge when it comes to achieving their company’s digital transformation goals.
Eleven percent of all respondents said they have no formalized digital strategy at all. Of these companies, over one-third (37%) say they lack the budget to create and deliver an effective digital strategy. A slightly smaller percentage (32%) say they are unsure how to create a digital strategy that is right for their organization.
Angela Kramer, a senior financial services analyst for RSM, says that companies can avoid a lot of wasted effort if they take time to develop a framework for their digital transformation journey.
“First, understand where you want to incorporate digital transformation and why,” Kramer says. “Then incorporate a solid team. Get people who really understand the big picture and how it is going to play out. It’s not about jumping into the deep end. It’s more important to have a planned, thought-out process.”
The potential of artificial intelligence
Of course, no discussion of digital transformation is complete without addressing artificial intelligence. In particular, generative AI, such as ChatGPT, has been a hot topic over the past year—not just within the realm of business, but in broader society.
AI offers many promising features for the middle market, ranging from data analysis to financial forecasting and more. These features can enhance efficiency, streamline processes and improve decision-making.
The middle market is exploring the use of AI amid this rapidly changing technology environment. At the time of our survey in April, fewer than half of executives polled (44%) said they or someone they worked with had personal experience using ChatGPT or a similar generative AI platform. Broader company adoption was similar: Just 28% said their business was currently using AI and machine learning, and another 20% said they were planning on using it within the next year. Since that time, it would appear the adoption of this new technology has quickly risen, with numerous polls, news releases and public company earnings transcripts citing the ubiquity of AI.
“Artificial intelligence is an exciting topic and a highly contagious narrative,” Kramer says. “Critically thinking through all the implications, AI has the potential to be more transformative to businesses than the industrial revolution.”
Many experts agree that artificial intelligence could have a tremendous impact on businesses. Countless AI-driven applications have flooded the market. Goldman Sachs estimates that global AI investment could total $200 billion within two years.
But as with all new technologies, potential hurdles exist, including legal gray areas about the use of AI-generated content. Tauseef Ghazi, RSM national leader of security and privacy, says companies need to pay attention to AI. “AI has the ability to automate many manual processes and improve efficiency,” Ghazi says.
"I'm really intrigued by what's going on with AI. I'm really starting to dip my toes into that area. It’s as interesting a tool as I have seen."
Executive, Business services industry
But are companies losing valuable time waiting for AI applications to take off?
“The runway for these types of transformative technologies is typically much longer than many anticipate and can be obscured by the hype around the ‘next big thing’,” says RSM Deputy Chief Economist Kevin Depew.
He adds that two issues facing many small and mid-sized firms are low knowledge diffusion and low absorptive capacity.
“It will take time to create the internal conditions at the firm level for successful adoption and implementation of generative AI tools,” Depew says. “Because this technology has the potential to dramatically move the needle in terms of productivity and margins, the first-mover advantage is probably overstated. This is a long-term and far-reaching transformation.”
Hickethier, the human-centered design expert, notes that successful companies will use AI to create transparency between employees and customers, allowing interactions to be streamlined and more productive.
“We’re going to see a lot more AI used with cloud-based call centers, knowledge-based systems and business intelligence tools,” he says. “These will have a massive impact on an employee’s ability to more rapidly and powerfully engage a customer, using deep knowledge about that customer to make a connection.”
IT talent remains scarce
The labor market is still tight, and attracting qualified IT personnel can be challenging. This may be an issue for the foreseeable future, which is bad news for the 40% of all respondents who said finding and retaining tech talent is somewhat or very difficult.
The result of an understaffed IT department is more serious than working around technical glitches or enduring long holds for the help desk. Without enough qualified IT personnel, a company’s digital transformation journey comes to a halt. In fact, 29% of all respondents said the shortage of skilled IT personnel is a main issue when it comes to fulfilling their digital transformation plans.
"I cannot emphasize enough that the people at the higher levels who make the approvals should have the people who are going to be handling the system be part of the process."
Executive, Professional services industry
Ironically, overcoming IT labor shortages may require companies to lean further into technology.
“One way around the labor shortage is to incorporate tools and technology to drive efficiencies and improve connectivity,” Kramer says. “And to improve retention, companies should use these amazing tools that create operational efficiencies and allow your employees to focus on high-value responsibilities. Employees notice if they are free of boring, repetitive tasks that hinder their professional growth.”
Kenney says another option for companies with staffing needs is to consider hiring a managed service provider to handle their IT functions.
RSM managed IT services
Organizations can greatly benefit from outsourcing their IT functions to a managed services provider. To learn how managed services can help a company focus on its core business while still maintaining a technological edge, visit RSM’s managed IT services page.
“Outsourcing the effort of becoming digital can help companies focus on their business,” Kenney says. “They may want the benefits of digital transformation, but they might not want to go through implementing and running a new system. A provider can handle the operation of the system, so the company doesn't have to take that on.”
How do companies measure progress?
Middle market company executives agree that digital transformation is important, but their results don’t always match their vision.
Just over a third (38%) of respondents say they have substantially achieved their digital transformation goals. However, a slightly larger percentage (41%) say they are way off from achieving their digital transformation goals.
Regardless of how close an organization is to achieving its digital transformation ambitions, company leaders need to acknowledge that the process is never done. After all, digital transformation is not a checklist to complete. Rather, it is a process of constant improvement.
“Digital transformation is an evolution of capabilities,” says Morgan, the management consulting principal. “This is not a one-and-done procedure. If you think it’s over, and you have nothing further to work toward, you’ve probably made a mistake.”
Even if companies are committed to digital transformation, they may have trouble measuring their return on investment. For this reason, it is crucial for companies to invest in change management and create the right processes to track their progress.
Kenney says that some organizations undertake digital transformations only to squander the advantages that the investment brings.
“There are companies that have invested in expensive ERP systems and now have the ability to sort data all kinds of different ways, but their employees still print out the standard report, sit down with a highlighter and circle things. It’s not helpful to have a powerful CRM system to track opportunities but then have employees send PDFs to other departments that have to reenter that data into another system. Companies need to stay digital throughout that whole process.”
While it is vital for companies to assess the impact of digital transformation, it is also true that the full effects of their decisions can cascade for years and in multiple ways. Ghazi, the security specialist, gives the example of utility companies that replaced the manual task of walking around and checking meters with the faster process of automatically collecting data from the meters. He says that utility companies kept improving the process until they could capture data that helped them set rates and gauge customer needs.
“The utility companies came up with a solution that made them more efficient, and that solution, in turn, led to more innovation and more efficiency,” Ghazi says. “Digital transformation creates new systems, new architecture and new infrastructure, which potentially can help companies in ways that they never even anticipated.”
Cybersecurity is a top concern
For many companies, digital transformation doesn’t mean upgrading platforms, utilizing new technology or even addressing long-standing issues. Many organizations are simply focused on securing their assets and strengthening their IT infrastructure. Establishing or maintaining effective cybersecurity is a powerful reason companies invest in digital transformation.
Cybersecurity dominates the landscape of digital transformation. There is a good reason for this: hackers constantly attack companies of all sizes and threaten to destroy their financial foundations and reputations.
CYBERSECURITY SPECIAL REPORT
Companies cannot be lax when it comes to cybersecurity. Hackers constantly seek access, and the results of a breach can be devastating. Read the 2023 RSM Middle Market Business Index Cybersecurity Special Report to learn how businesses can better protect themselves.
An overwhelming 88% of all respondents said they currently employ cybersecurity or data security in their businesses or plan to do so within the next 12 months, making it the most popular choice in the survey. Increased concern over cybersecurity was the top motivation respondents gave (65%) for changing their IT budgets.
The 2023 RSM Middle Market Business Index Cybersecurity Special Report surveyed over 400 senior executives of middle market companies. Twenty percent of respondents said their company experienced a data breach within the last year, and more than two-thirds (68%) anticipate that unauthorized users will attempt to access their data or systems in 2023.
High-profile hacks of American companies have made corporate leaders nervous over their vulnerabilities, and as a result, organizations are fortifying their digital infrastructure rather than investing in new technologies. In essence, protecting what they have is fueling companies’ technology spending.
But this comes at a cost. Almost one-third (32%) of all respondents in the Q2 MMBI survey said cybersecurity concerns present a main challenge to achieving their digital transformation goals.
Ghazi says times have changed, and companies sometimes struggle to keep up.
“Previously, nobody could cart out file rooms worth of data,” he says. “But now that information is digitized, and if you don't have the appropriate cyber protections around it, your data can be compromised or taken out of your network very, very quickly.”
The future of digital transformation
Digital transformation can have an enormous impact on an entire organization.
Companies can increase their efficiency and productivity while improving the customer experience and making life easier for their employees. Digital transformation can make companies more agile and competitive. The process can improve collaboration, reduce expenses and create new business models. Conversely, ignoring the power of digital transformation creates an environment of stagnation and assures that the organization will lag behind its peers.
With the advent of generative AI and other cutting-edge technologies, companies face crucial decisions about how far and fast they will go on their digital transformation journeys. And there is a wide range of approaches to the process.
“Some organizations are just going from analog to digital, maybe taking a paper document and converting that into a digital document,” Ghazi says. “Others are using complex data that gives them insights and real-time information, and this helps them make better decisions and innovate new ideas.”
Successful digital transformation requires thorough planning, strong leadership and a willingness to adapt. Implementing or upgrading technology is just the beginning. The process can reshape mindsets and strategies to create lasting improvements in the organization’s functioning.
No matter how far along a company is in the digital transformation process, the crucial component—true in every organization in every industry under all conditions—is that people make all the difference. Digital transformation is only as successful as the individuals who benefit from the new technology.
“The real power behind an effective digital transformation is the people,” Hickethier says. “Change can take place only when you emphasize the human-centered aspect before the technology.”
The RSM US Middle Market Business Index survey data in the second quarter of 2023 was gleaned from a panel of 1500 executives (the Middle Market Leadership Council) recruited by The Harris Poll using a sample supplied by Dun & Bradstreet. All individuals qualified as full-time, executive-level decision-makers working across a broad range of industries (excluding public service administration): nonfinancial or financial services companies with annual revenues of $10 million to $1 billion and financial institutions with assets under management of $250 million to $10 billion.
These panel members have been invited to participate in four surveys over the course of a year that include special issues-based question sets, as well as monthly index-only surveys; the 2023 second-quarter survey was conducted from April 3 to April 24, 2023. Information was collected by phone and online survey from 404 executives, including 187 panel members and a sample of 217 online respondents. Data is weighted by industry.
The U.S. Chamber of Commerce is a partner in this research.
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