RESEARCH REPORT
Reinventing with a digital core
Chapter 1: How to accelerate growth through change
5-MINUTE READ
July 16, 2024
In brief
- To thrive amidst change and capture the value of disruptive technologies like generative AI, companies need a digital core that is reinvention ready.
- To do this, companies must 1) Build an industry-leading digital core 2) Boost investments in innovation 3) Balance technical debt.
- According to our research, doing all 3 created a 60:40 effect: 60% higher revenue growth rate and 40% higher profitability.
The technology capability your business needs, now
How can companies grow through constant change? This question is on the minds of executives as they face unprecedented disruption in their business environment.
Technology is now ranked the #1 most disruptive force today (up from #6 from a few years ago)—largely due to the rapid rise of generative AI. The enormous power of gen AI to reinvent every facet of business is not lost on companies.
However, expectations for gen AI are exceeding their current digital core capabilities:
50%
of executives believe that they can scale gen AI enterprise-wide in 6 to 12 months.
13%
are “extremely confident” that they have the right data strategies and the core digital capabilities in place to effectively leverage gen AI.
This gen AI-fueled, strategic shift towards reinvention has created an enormous need for a digital core: one that amplifies machines, humans and the interaction between the two in new and significant ways. Our analysis of 1,500 companies across 10 countries and 19 industries reveals that a digital core that is “reinvention-ready” is non-negotiable today.
What is the digital core?
We define the digital core as the critical technology capability that can create and empower an organization’s unique reinvention ambitions.
Not all digital cores, however, are built the same, and every company’s journey will be different.
Powering the potential of generative AI
The digital core is what enables gen AI—or any future disruptive technology—to deliver its full potential.
In our analyses, companies with industry-leading digital cores (top 25 percentile of our Digital Core Index) are reinventing twice as many functions with gen AI and are expected to create twice as much value. Early gen AI adopters see more benefits in terms of scale and scope of their projects.
Whether gen AI or the next new thing, the digital core is the engine that enables your company to drive reinvention with transformative technology.
What does it take to become reinvention ready?
Our research has identified three tenets that companies must follow to achieve reinvention readiness with the digital core:
The 60:40 effect
60%
higher revenue growth rate (from 7.1% to 11.1% on average)
40%
higher profitability (from 14.2 to 19.4 percentage points on average)
And as of today, only 3% of companies have cracked this code. Now is the time to act on these three tenets, to pull ahead of the pack.
01
Build an industry-leading digital core for your industry and company
Our research shows that companies need to achieve an "industry-leading" level of digital core capability—defined as the top 25th percentile in our Digital Core Index—to empower continuous reinvention.
The Digital Core Index represents the aggregate strength of a company’s digital core as the average of each of its seven components' capabilities – their digital platforms, data, cloud-first infrastructure, composable integration, AI, security, and continuum control plane.
Digital Core Index
According to our research, achieving this “industry-leading” level, on its own, has many benefits:
Benefits of an industry-leading digital core
20%
higher revenue growth rate
30%
increase in profitability
54%
strongly agreed their enterprise systems help them diversify into other geographies and industries
2X
greater integration and end-to-end engineering and operations visibility (i.e., CCP)
Also promising—we found strong correlations between different components of the digital core. Which means when one is improved, it can create a ripple effect across others. For example, higher digital core capabilities enable greater AI adoption, while greater AI adoption can in turn further the development of the digital core. It’s a virtuous cycle.
02
Boost investments in innovation, including re-engineering systems for machine (AI) operations
Getting to a reinvention-ready digital core requires continuously boosting the proportion of IT budgets dedicated to strategic innovation (like gen AI). We found that shifting at least 6% yearly from maintenance to innovation was a recipe for success.
How are companies doing it? We see many reducing inefficiencies by rationalizing vendors, optimizing cloud costs and operationalizing wholesale automation. They can use those freed-up funds to redesign business processes, launch new products and services and enter new markets.
80%
of companies are likely to grow their innovation budgets beyond 2023 at twice the intensity than they have before.
Designing with machines in mind will help generate those efficiency payoffs. Consider a future supply chain process where things like data collection, trend analysis, pre-ordering, system optimization are all designed to be accomplished end-to-end by machines. Humans can still intervene at any step, but the resulting system increases efficiencies and saves costs that can be reinvested.
03
Balance technical debt liabilities with future investments using programmatic methods
Many companies that relied on a “move-as-fast-as-you-can” strategy during the pandemic found themselves with mounting technical debt. Today, a more balanced approach to innovation is needed.
Our analysis reveals that leading companies allocate, on average, 15% of the IT budget toward tech debt remediation. It’s the sweet spot that enables “paying down debt” without sacrificing strategic investments.
Today’s companies are using gen AI and other technologies to maintain evergreen IT. But our research revealed that AI has risen to become a leading contributor to tech debt, tied with applications.
Clearly AI can be a double-edged sword. This means that companies looking to rapidly scale gen AI capabilities must invest in tech debt remediation to counter the potential pitfalls.
We see more programmatic approaches being used to contain technical debt at code, infrastructure and other parts of the system.
Benefits of reinvention readiness
Creating a reinvention-ready digital core simplifies the adoption of new technologies like gen AI. It also enables companies to break other performance barriers.
Companies adhering to all three tenets are:
1.3X
more likely to say that their digital core enabled them to identify and mitigate risks (cyber, regulatory, Responsible AI) across multiple technologies, applications and ecosystem partners.
1.4X
more likely to say that their digital core enabled their non-IT employees to create their own customized solutions using low code/no code tools.
New ways of working
To be reinvention-ready, a company must also continuously adopt new ways of working, including new operating models, methods and processes for their workforce. This starts at the team level, and many companies are making great strides:
68%
report building strong capabilities around dynamic teams, where team members can rotate on and off based on project needs
67%
are developing strong multi-disciplinary teams that are cross-functional and integrate technology and other skills
60%
of companies in the top quartile of our Digital Core Index design talent capabilities and technology solutions to enable continuous change (vs. 49% of others)
So where do you start?
In this chapter, we established that a digital core is critical for a company to carry out continuous reinvention.
Our next chapter will share how to build your digital core strength. We’ll illustrate the new engineering principles you should apply on your journey, and provide a roadmap to reinventing with a digital core.