Spend Your 2018 Tax Windfall Amazon-izing Your Company

At a holiday dinner with a table full of CEOs from around the country the other night in Manhattan, the subject turned, as it does these days, to Amazon. Was it having an impact on your business? Yes, said some, no said most. This was a B2B crowd. One went so far as to say the jury was still out on digital disruption.

I have news for him: After listening to new research from AlixPartners and MIT’s Sloan Center for Information Systems Research, which they presented at our recent CEO2CEO Summit on Dec. 7 in New York, the jury has come back, and they’re unanimous. If you’re not Amazon-izing your company right now, you’re in trouble, and likely paying a severe penalty already. Truly digital companies, they found, are now enjoying profitability that far outstrips their non-digital peers, and the gap is growing fast as they use their winnings to press their advantage.

That’s why, whether you’re a mid-sized manufacturer or a large law firm, B2B or B2C or some combination of both, 2018 is the year to make the leap across the digital divide. Amazon, and its frictionless customer service, is your benchmark. The way to get it done? Use the windfall Congress just gave you via the tax cut as a down payment on your future.

Shareholders and employees may demand their share, you may want to use it to dive into a new product line or do some hiring. But the single most important investment you should make with that money is to start making your company a truly digital company.

“armed with more effective and efficient operations, FUTURE READY COMPANIES are in a much stronger position to transform customers’ experiences which, in turn, generates deeper customer loyalty.”

No, it won’t be easy. Yes, it will be expensive. At first. But you’ve got to get going on it.

Future Ready vs. Silos and Spaghetti
The research, by AlixPartners’ Meade Monger and Jill Nickerson with Stephanie Woerner at MIT SCIR, which Monger and MIT’s Leslie Owens presented at CEO2CEO, makes the case in eye-popping fashion.

Companies that offer a strong customer experience and operational excellence using centralized platforms for collecting and using vast amounts of data in near-real time, enjoy net margins a full 16 percentage points higher than their industry peers, they found. These “future ready” companies, as they call them, or “Amazon-ized,” as I like to think of them, represent about 23% of all firms.

Meanwhile, most companies—some 51%—are struggling on the other side of the bridge. These firms operate with “silos and spaghetti”—operations based on aging computer systems that don’t work and play well with others, where the right hand doesn’t know what the left is doing much of the time, and heroic IT warriors spend the bulk of their time and money defensively patching things to keep them going. These firms, according to the study, have net margins 5.1% lower than their industry peers. That yawning gap is growing.

The companies that were furthest along on the path to being “future ready” aren’t the ones you’d expect. Leading the pack were manufacturers, (where 36% of the firms studied were future ready), as well as heavy industry (35%). Everyone else was way behind—including IT, telecom and media (24%), retail (14%), financial services (11%) and services (8%).

Mind the Gap
What separates the future-ready from the silos and spaghetti? No surprise here: Spending. The AlixPartners/MIT CISR research found that the digitally-transformed companies spend an average of 4% of their annual revenue on IT investment. What is surprising is that the left-behinds aren’t spending that much less—an average 3.2% of annual revenue goes to IT.

It’s how they are spending that money that makes all the difference. “They invest heavily in their IT infrastructure, including operating platforms,” according to an August, 2017 AlixPartners/MIT report. “And they allocate more money to new IT-related projects than less digitally-sophisticated companies do. They also commit larger portions of their overall budgets to digital technologies, which indicates that the top IT executive understands the organization’s business strategies and is investing to make sure that technology supports and enables strategic success.”

They have the highest number of internal application programming interfaces (APIs). They have a wealth of Internet-of-Things-enabled assets, which further accelerate operations and collect vast troves of data they can act on. They also see IT spending as something to be done across many categories, not just as one big “tech” bucket. Every department is a tech department, backed by “scalable and reliable operating platforms” that automate business processes, maintain daily operations, and help make better, faster decisions and serve customers better (think Amazon).

Getting there isn’t free, and yes, there is no doubt it is tough to compete with digitally native companies that started their tech from scratch. Building these platforms will require investment—maybe carving off a swat team of your best and brightest as an internal startup, or bringing in consultants who can help get things done.

But once a company has made the transformation, the AlixPartners/MIT research found there’s a rich, two-fold reward: the amount of money it will have to spend to sustain the platform declines, freeing up cash for more new technology. “Plus, armed with more effective and efficient operations, a company is in a much stronger position to transform its customers’ experiences which, in turn, generates deeper customer loyalty.

“And that,” says the report, “translates into increased profitability” (again, think Amazon).

In other words, it’s a flywheel, spinning faster and faster. If you don’t have one, 2018 is the year to get one, or risk being left behind.