Digital firms have 'significantly better financial performance than competitors' - MIT and Capgemini study

Three-year research programme finds that 'digital masters' have a 26 per cent higher profit margin than peers

Firms that have clearly defined digital strategies, and that invest in technologies such as mobile applications, social media and analytics, are more profitable than their competitors, according to a new study from consulting firm Capgemini and the Massachusetts Institute of Technology (MIT).

The three-year research programme on digital transformation was undertaken at the MIT Center for Digital Business in Boston, and its objectives were to understand the impact digital technologies have in large organisations, the link between digital leadership and financial performance, and how digital transformation is managed in practice.

At a press event at the Center for Digital Business, Didier Bonnet, senior vice president and global practice leader for digital transformation at Capgemini, said that it wasn't always the technical aspects that were crucial for businesses to flourish in using digital technologies.

"What made the real difference was the vision, the governance, trying to leverage the investment across the whole business and the engagement of the employees," he said.

He added that many of the firms that were examined under the study completed their digital transformation without IT, and many vendors promote their products to the businesses without involving IT at all.

"We heard from many companies about the usual stories of the IT [department] being too late, too expensive, taking too long to deliver, and many of the marketing teams decided to go forward with technologies without having to talk to IT," Bonnet said.

The survey involved 391 companies, 184 of which were publicly-traded. The overall study is part of a new book dubbed "The New Digital Masters" - and is based on 160 in-depth interviews, factoring-in survey results from over 2,500 global organisations.

MIT and Capgemini divided the companies into different categories depending on their maturity in both digital technologies and leadership capabilities. Those that were found to be mature in both departments were referred to as "digital masters".

Then, taking the sample of 184 publicly-traded companies, it found that "digital masters" had significantly better financial performance than the average performance of all large firms in the same industry, both in terms of revenue generation efficiency (nine per cent higher), and profitability (26 per cent higher).

It found that those firms who were fashionistas (advanced in their use of digital technologies but lacking leadership capabilities) had a six per cent better performance in revenue generation efficiency than their peers, but were 11 per cent less profitable. In contrast, those firms labelled conservatives were down 11 per cent in revenue generation efficiency to their competitors, but were more than nine per cent more profitable than their peers.

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Digital firms have 'significantly better financial performance than competitors' - MIT and Capgemini study

Three-year research programme finds that 'digital masters' have a 26 per cent higher profit margin than peers

Fashionistas had a 12 per cent lower market valuation than their peers, while conservatives were around seven per cent better off on the whole, in terms of market valuation. Meanwhile, digital masters were 12 per cent up on the same terms. Unsurprisingly, beginners - those who aren't mature in either digital or leadership capabilities, were worse off in all three categories than their peers.

George Westerman, MIT research scientist at the MIT Sloan centre for digital business, explained that the ‘digital masters' could be companies that are the best managed who are using digital technologies in this way, or could be companies that started doing digital this way that are now becoming more profitable as a result.

In terms of industries, high-tech firms were top of the ‘digital masters' list, with retail and banking following closely behind. Telecoms, travel and hospitality were industries labelled as fashionistas, utilities and insurance were found in the conservatives division, and pharmaceuticals, consumer packaged goods and manufacturing were all found in the beginners sections.

But within each industry, there are differing proportions of digital masters, and only three industries (high-tech, banking and insurance) had a higher proportion of digital masters than any other category.

At the press event, MIT and Capgemini used several examples of companies that had successfully implemented digital strategies including Burberry under the stewardship of soon-to-be Apple head of retail and online sales, Angela Ahrendts (pictured); Nike; and global gaming, hotel and resort company Caesars.

Westerman explained how Caesers has developed its use of digital technologies to target customers.

"They have freedom flier programme, called total rewards and they use it to send customers coupons. They use it when you check-in as they know whether you typically lose a lot of money when gambling or whether you don't and they treat you differently. If I'm what they call a ‘whale' they know they will get a lot of money out of me so I get special treatment, but they developed that further.

"Now if I'm walking down the strip in Las Vegas, I can get sent a coupon from the firm suggesting that I go and visit the casino and place a few bets," he said.