Does Your C-Suite Have Enough Digital Smarts?

Executive teams that understand how to wield the power of digital technologies are rare, but they deliver huge premiums in corporate growth and valuation.

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Image courtesy of Anna & Elena Balbusso/theispot.com

There’s little doubt that the future of business is digital. Companies that are in the lead implementing digital technologies have radically improved their operational efficiency and their customers’ experiences. And, even more important, the new capabilities unlocked by digital technologies have allowed them to reimagine their purposes and their business models.

Having a digitally savvy top leadership team — that is, a team in which more than half of the executive members are digitally savvy — makes a huge difference. Our latest research shows that large enterprises with digitally savvy executive teams outperformed comparable companies without such teams by more than 48% based on revenue growth and valuation.

Digital savviness is an understanding, developed through experience and education, of the impact that emerging technologies will have on a business’s success over the next decade. Sharing this understanding across the top management team is a key ingredient in the success of corporate transformation. As Jean-Pascal Tricoire, chairman and CEO of energy management company Schneider Electric, told us, “When every business becomes a digital business, every executive needs to take digital transformation personally. The last thing you want in your team is the belief that digital is somebody else’s problem.”

Unfortunately, the demand for digital savviness in the upper echelons of leadership has grown far more quickly than the supply. In 2019, when we studied the boards of directors in 3,228 large U.S.-listed companies with more than $1 billion in annual revenues, we discovered that only 24% of boards were digitally savvy.1 In 2020, we extended our research to encompass top management teams — C-level executives and leaders of functions and geographic territories — in 1,984 large companies globally. Our new findings indicate that only 7% of companies have digitally savvy executive teams.

In this article, we report the findings of our research into the level of digital savviness among top management teams, the business value it delivers, and the actions that companies can take to increase the digital savviness of their senior executives.

A Notable Dearth of Digital Savvy Among Leaders

Among the companies we studied, the average top management team has nine members. Overall, only 17% of individual team members are digitally savvy.

We found that the digital savviness of top executives varies widely by role. (See “The Most — and Least — Digitally Savvy Executive Roles.”) Slightly less than 1 in 4 CEOs, and only about 1 in 8 CFOs, are digitally savvy. As you might expect, chief technology officers (CTOs) and CIOs are more likely than other executives to possess this capability, but this is not cause for celebration: Only 47% of the CTOs and 45% of the CIOs can be considered digitally savvy. Often, the attention of top technology executives is focused more on IT infrastructure and back-office operations than on the more strategic quest to create business value from digital technologies.

We also found large variations in the digital savviness of executives across industries. The highest proportions of digitally savvy executives — approximately one-third of top team members — are working in media, software, and telecom companies. Companies in construction; arts, entertainment, and recreation; and agriculture, forestry, fishing, and hunting had the fewest digitally savvy management team members, with less than 1% of executives with this expertise.

Only 12% of top team members are digitally savvy in the finance and insurance industry, underscoring its vulnerability to disruption by more agile fintech startups. Interviews with industry executives suggest that this reflects an overwhelming focus on ensuring compliance with regulations rather than on creating value via new products and business models.

Digitally Savvy Top Teams Deliver Performance Premiums

While an overwhelming majority of top teams are not digitally savvy, the few teams in which half or more of members are deliver an extraordinary performance premium. Overall, companies with such executive teams have 48% higher revenue growth and higher valuations (share price to sales ratio) and 15% higher net margins than the rest of the companies we studied.

Companies don’t have to achieve a threshold of 50% of top team members who are digitally savvy to begin recording performance gains; ongoing, incremental advances in digital savviness also pay off. We found that as the percentage of digital savviness on top teams increases, so does net margin and revenue growth. For every 10% increase in top team digital savviness, there is a 0.4 percentage point (pp) increase in profitability and a 0.7 pp increase in revenue growth, compared with the industry average.

The effect of digitally savvy top team members varies by role. Companies with digitally savvy executives in five roles — CEO, CFO, head of marketing, head of corporate communications and investor relations, and head of compliance and legal — have the strongest statistical link to high performance. For instance, top-performing companies are twice as likely to have a digitally savvy CEO. And having a digitally savvy corporate communications executive who can convince stakeholders that the company will thrive in the digital era is also statistically significant.

One particular combination of digitally savvy executives makes a substantial difference in company performance. A digitally savvy CEO is associated with a 0.8 pp increase in revenue growth. But companies that partner such a CEO with a digitally savvy CFO who, rather than operating as a gatekeeper, can help identify which digital investments have potential to promote breakthrough performance have an additional 5.9 pp increase in revenue growth, for a 6.7 pp increase in total. It’s that combination of strategic vision and digitally savvy financial skills working together that delivers premium performance.

“A new-age CFO takes on the traditional roles but also focuses on the business impact of data and technology disruption,” explains Arno Daehnke, CFO of Standard Bank Group, Africa’s largest lender by assets. “Being digitally savvy means challenging business assumptions, predicting and influencing the financial impact of business and technology decisions, and understanding the road map and prioritizing investments to become future ready.”

What Companies With Digitally Savvy Top Teams Do Differently

When we assessed companies that had both digitally savvy top teams and top-quartile performance in net profit margins and one-year revenue growth, we found companies in high-tech industries are not the only ones that excel at transforming digital technology into business value. Among the non-technology companies, the digitally savvy top performers include Charles Schwab, Dunkin’ Brands, Marathon Oil, Ovintiv (formerly known as Encana), and Visa.

For example, to improve its customer experience, in 2018 Dunkin’ Brands rebranded and invested heavily in technology infrastructure and customers’ mobile experience. By fiscal year 2019, 13.6 million customers had enrolled in the DD Perks loyalty program, and in the fourth quarter of 2019, Dunkin’ generated 5% of its global sales and 13% of U.S. sales from mobile orders and payments.2

The digitally savvy top teams in all of these companies operate very differently than the top teams in the less successful companies that we studied. The three areas in which the largest differences appear are breakthrough performance, enterprise practices, and leadership emphasis. (See “How Digitally Savvy Top Teams Drive Performance.”)

Digitally savvy top teams are pursuing breakthrough performance via innovation, cross-selling, and business transformation. For example, the companies in the top quartile generate a whopping 59% of revenue from innovations introduced within three years — compared with only 18% in the bottom quartile of companies. In a digital world, innovation and business transformation aimed at meeting more of customers’ needs and earning a larger share of their wallets are early indicators of better financial performance.3

We also found that digitally savvy top teams achieve their industry-leading results in part by creating rapid learning cultures that are typified by test-and-learn experimentation, minimum viable product releases, and evidence-based decision-making.

The information technology approach that supports these practices is modular, open, and agile. The leading companies use application programming interfaces (APIs) to transform their “crown jewels” (what they already do best) into digital services that can be tapped internally for innovation and externally by partners to create ecosystem value. For instance, at the companies in the top quartile of our study, more than half of core capabilities are enabled by APIs, compared with 19% at the bottom-quartile companies.

Digitally savvy top teams lead differently than less savvy top teams, too. They have moved away from the command-and-control leadership model to a coach-and-communicate approach. They support this change with the widespread use of evidence-based decision-making. Rather than relying on instinct or what has worked in the past, digitally savvy top teams develop hypotheses and test them, looking for early measures of success that are correlated with financial performance. This allows executives to identify and solve problems sooner.

For instance, Standard Bank Group uses advanced analytics and tools such as machine learning to establish the relationship between leading nonfinancial metrics and financial outcomes. “Ultimately, the outcome of corporate strategy will be measured in the financials, be it revenues, earnings, or [return on equity]. But we find that these measures are lagging and difficult to take immediate action on,” explains Daehnke. “Hence [our] focus on leading indicators.”

Developing a Digitally Savvy Top Team

Bolstering the digital savviness of senior leaders represents a valuable upskilling opportunity for most companies and a high-return investment in the increasingly digital future. We suggest that companies pursuing this opportunity consider the following recommendations:

Determine the current level of digital savviness on the top team. We suggest that to begin developing a more digitally savvy executive team, the CEO, chief human resources officer (CHRO), and the CIO have a frank discussion. This conversation should identify the digitally savvy executives on the team and, by extension, those lacking this capability. The business should assign responsibility to a senior executive for increasing the digital savviness of all team members. Often, this will be the CIO or the CHRO, or perhaps both executives working together.

Strengthen the key members first. The leaders of this effort should first focus on strengthening the digital savviness of the executives occupying the key roles of CEO, CFO, head of marketing, head of corporate communications and investor relations, and head of compliance and legal. If the CEO is not yet digitally savvy, this is the logical place to start. After all, it is CEOs who lead companies to new ways of doing business — changing the organizational culture and reorganizing the company to take full advantage of new technologies.

Most CEOs are not “born” digitally savvy. Instead, they develop that understanding on the job. Fernando Gonzalez, CEO of the global building materials company Cemex, did this by spending time with experts in technology-driven strategic business transformation, attending focused executive education programs, and reading widely. He used the knowledge he gained in these pursuits to lead the effort to develop Cemex Go, the first one-stop customer platform in the industry, which launched in 2017. By mid-2019, Cemex Go had achieved 96% adoption among the company’s repeat customers and was processing 45% of its annual sales.4

Our research shows that foremost, executives must be curious and willing to learn to become digitally savvy. If key members don’t have a keen interest in how technology can shape strategy, it may be better to replace them. Companies often use peer networking to start spreading digital savviness, so consider creating projects that connect less-savvy organizations and executives and more savvy ones (such as startups, technology accelerators, CIOs, and CTOs). There’s nothing like leading or being part of a team that builds an API to enable new revenue-generating partnerships or that uses real-time data as the basis for a new customer offering to increase executive digital savviness.

Expand the effort. Once executives in key roles begin to increase their digital savviness, leaders of the effort should aim to develop the capability more broadly, targeting at least 50% of top team members. During his stint as chief digital and information officer at Principal Financial Group, Gary Scholten did this by organizing visits to digitally native companies by the financial services firm’s entire executive committee. The goal of these trips, Scholten said, “wasn’t so much to hear about their products; it was more to understand how they approach doing business.”5 He also helped the executive committee host internal hackathons and ferret out the perspectives of Principal’s own digital experts.

Pursue the 10 performance differentiators. As top teams become more digitally savvy, they can focus their attention on the factors that distinguish the high-performing companies we studied. The executive committee at Principal did this by examining all of the company’s digital offerings and projects from a strategic perspective. It identified those offerings that promised to deliver the greatest competitive differentiation, and the few projects with the most potential to be transformative. Through this effort, the committee developed a portfolio of investments with an internal rate of return exceeding 20%, with two-thirds of the benefits coming from top-line growth.

The resulting portfolio included the development of digital retirement enrollment tools, life-event-based robo-adviser solutions, and AI-based investment research tools that enabled the company to develop customized investment products. Principal’s board approved the significant investment needed to accelerate the transformative digital business strategies, and the company communicated its intent to the investment community. Two years into Principal’s three-year accelerated investment initiative, the company is on track to achieve its goals for revenue growth and expense management.6

In the coming months, as the global economy begins to recover from pandemic-induced slowdowns, the digital savviness of top teams will make the difference between the winners and the also-rans across industries and geographies. Now is the time to consider the digital savviness of your top management teams and ask yourself what you can do to bolster it. Your efforts could be key to your company’s future success.

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References

1. P. Weill, T. Apel, S.L. Woerner, et al., “It Pays to Have a Digitally Savvy Board,” MIT Sloan Management Review 60, no. 3 (spring 2019): 41-45. In the study described in this article, we defined a board as digitally savvy when it included at least three digitally savvy members.

2.Q4 & FY 2019 Investor Presentation,” Dunkin’ Brands, Feb. 6, 2020, http://investor.dunkinbrands.com.

3. P. Weill, S.L. Woerner, and N. van der Meulen, “Four Pathways to ‘Future Ready’ That Pay Off,” European Business Review, March 23, 2019, ww.europeanbusinessreview.com.

4.Cemex Completes Deployment of Cemex Go With Customers Worldwide,” Cemex, May 30, 2019, www.cemexusa.com.

5.What Makes a Digital Savvy Top Management Team — Gary Scholten,” filmed May 18, 2020, at the MIT CISR Digital Leadership Summit, video, https://cisr.mit.edu.

6. P. Weill, G. Scholten, and S.L. Woerner, “Working With Boards on Digital,” research briefing XIX-9, MIT Sloan CISR, Cambridge, Massachusetts, September 2019.

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Comments (2)
Kumar Venkatesan
This is an insightful analytical report and exhaustive summary!
Sajeev Emmanuel Medikonda
The article clearly makes the case for having Digitally savvy leaders. However, where I would like some clarity is with the definition of 'Digital savviness' at an invidual level.