10 ways to fund the shift to digital business: Gartner

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In Gartner’s 2017 CEO survey, 42 per cent of CEOs reported they are now taking a digital-first approach to business change or taking digital to the core of their enterprise model.

CEOs also indicated that the bulk of money to fund digital initiatives comes from self-funding, rather than existing budgets, as the primary purpose of many of these initiatives is to increase revenue, rather than to save costs.

“This should give CIOs pause for thought, given conventional IT management works mostly on the basis of using operational budgets,” said Andy Rowsell-Jones, vice president and distinguished analyst, Gartner.

Analysts discussed digital transformation strategies at the recent Gartner Symposium/ITxpo, held on the Gold Coast, and outlined the top 10 ways to fund the shift to digital business.

1. Internal self-funding: digital revenue pays
According to Gartner, this approach will only work for short-term projects to gain immediate revenue returns, such as digital marketing campaigns or price-elevating product features, but not for disruptive market change. It requires clear revenue attribution.

2. Within existing budgets
This approach can work for superficial digital business change over two or three years, if there is a excess budget to work with, but will not be suitable for rapid transformation as it could stall existing business.

3. Investment from reserves
If reserves are healthy, using this option may accelerate digital transformation with low financial impact on current operations.

4. Increase relevant budgets and cut others
This approach may be used in cases where digital business growth will substitute for heritage business slowdown, and is useful if digital business is recognisable and deliverable in the same corporate structure to the same customer base. Gartner said it is not appropriate, however, for adjacency moves or radical industry reinvention.

5. Increase relevant budgets and cut profits
Perhaps most suitable where a threatening competitor makes the need for transformation obvious to all investors or stakeholders, or for private or family-held companies. May be required for deep, multiyear strategic change, with clear and careful explanation to investors.

6. New bond or equity capital from investors
Another approach if digital transformation requires heavy, multiyear investment. Small, fast-growing companies may raise equity capital by issuing more shares, while larger mature companies with strong reputations can raise debt capital through corporate bond issuance.

7. Borrow capital from lenders
For short-term financing requirements, loan capital could bridge gaps arising from digital transformation, but will typically only be supported in “conventionally describable, measured risk” situations.

8. Off balance sheet entries
For risky or unusual experiments, companies may consider placing all or part of the new digital initiative in a separate company with investors. According to Gartner, this is useful for ‘farming’ digital ecosystems and startups by working with VCs and incubators as co-founders, as well as for industry consortia.

9. Divestitures
Where digital disruption is highly impactful in an industry, this involves selling legacy business units early in the disruptive process to buyers who will essentially run them until they are no liable viable. These funds could then be used to fund new digital business ventures and revenue streams.

10. Asset disposals
Physical assets which are less useful in the digital business era can also be sold off in order to fund digital projects.

Whatever strategy CEOs and CIOs decide to employ, time is of the essence, according to Rowsell-Jones.

“This year and next are likely to be the optimal timing points of overlap between the business cycle and the tide of digital business change,” he said. “In two years’ time, the rising cost of capital could make strategic investment more expensive, and playing digital catch-up is harder.”

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