Digital transformation projects are colliding with productivity and efficiency initiatives for funding, but it's not a zero-sum game. Digital transformation projects should pay for themselves and drive business value.
According to Accenture, Infosys and Wipro, there are large digital transformation deals to be had, but there better be real value. Specifically, digital transformation projects must drive enough value-savings via automation, process improvement, productivity, or efficiency--to fund future projects.
From a business perspective, the idea that digital transformation should be held to real business metrics shouldn't be too shocking. However, enterprises are putting digital transformation and efficiency projects into two different buckets.
Accenture CEO Julie Sweet recently noted on the company's fiscal fourth quarter earnings call:
"I was with about 20 different CEOs, and they had three messages. Tech is super important, that's number one. Number two, they already have major programs underway, and they know they need to do a lot more. But number three is they're feeling cautious about the macro, and we've already seen that in the small deals. But they're asking us to help them save money and be more focused right now, even on the bigger programs."
What?!? You mean massive transformational tech projects need to drive business value?!?
Sweet said companies are looking to create digital cores, modernize and be data driven for future AI use cases. But only a third of Accenture's clients have "modern ERP programs." I've been around long enough to know that ERP implementations and upgrades don't exactly drive business value initially.
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- PepsiCo has its technology, process game down
Salil Parekh, CEO of Infosys, echoed Sweet’s take. Parekh, speaking on Infosys' third quarter earnings call said:
"We see that with our large deal wins in the past two quarters, we are winning market share in the area of cost efficiency, automation, and AI. As the economic environment changed, we rapidly pivoted from delivering transformation projects to also delivering productivity benefits and cost savings at scale."
Random thought: Transformation projects should have always delivered savings at scale.
Nevertheless, Parekh's comments indicate that enterprises still have cost savings and transformation projects in two separate buckets. "We are seeing discretionary spending come down and we saw that transformation programs being slowed," said Parekh, who said that cost savings programs should in theory fund future transformation projects.
Infosys said financial services, communications, utilities, manufacturing, and retail were all wrestling with transformation vs. cost cutting efforts.
Thierry Delaporte, Wipro's CEO, outlined the current tradeoffs with transformation vs. optimization projects. Speaking on the company's second quarter earnings conference call, Delaporte said:
"Clients are continuing to take a much more rigorous look at their investments. They are hyper-focused on efficiency, optimization of existing investments and faster return on new ones. Lower discretionary spending is a reality today. Transformation programs that are nearing their project term are being replaced by new ones, but at a slower pace."
Delaporte added that generative AI was a "part of every client conversation”, and clients are "exploring new use cases." A lot of those use cases are aimed at efficiency. "The attention to cost takeout, cost optimization, margin, productivity and so on has certainly been a lot bigger than it was some quarters ago. There is no doubt," he said.
Citigroup CEO Jane Fraser said the bank's clients are concerned about the economic backdrop and interest rates that will remain at current levels for longer. "I'm struck how consistently CEOs are less optimistic about 2024 than they were a few months ago," said Fraser.
Fraser also noted that Citigroup has its own transformation efforts underway, but her definition includes process improvements and automation. Process and automation drive the returns that can fund more transformation via lower headcount. She said:
"Transformation remains our number one priority. We're deep into the large body of work of automating manual controls and processes, consolidating fragmented tech platforms, and upgrading our data architecture. We're committed to doing this the right way, knowing it will take time to meet our regulators' expectations and to deliver a modern, more efficient infrastructure."
Citigroup CFO Mark Mason said the bank's expenses in the third quarter were up 6% in part due to transformation projects, but those expenses were partially offset by productivity gains. In the third quarter, Citigroup's technology spend was $3 billion "driven by investments in product development, platform enhancements, and improving the client experience." Mason added:
"Our transformation and technology investments span the following themes: platform and process simplification, security and infrastructure modernization, client experience enhancements, and data improvements. Our investments in the transformation will continue to enhance our data analytics and stress testing capabilities, enabling continued capital optimization."
Does Citigroup have the transformation playbook down? Not quite. Fraser was asked why Citigroup's latest transformation plan will be any different than the others launched in the last decade.
But I'm willing to bet that Citigroup's approach is on target at a high level. Digital transformation projects need to be integrated with continual process improvement, productivity efforts and a never-ending drive to be more efficient to drive real business value. If an enterprise can produce operating savings of 5% a year it can self-fund digital transformation projects going forward.
Somehow enterprises have siloed digital transformation projects away from other business initiatives. That's not real transformation. It's just legacy enterprise technology.