Digital transformation is top of CEO agendas: KPMG

| December 8, 2018

Digital transformation is the number one priority for Australia’s business leaders as the market looks to the New Year, according to a survey by KPMG Australia.

The dual challenges of innovation and disruption take second place, while concerns over dealing with regulation and Australia’s political paralysis place third and fourth, according to more than 220 C-suite executives surveyed by research and insights group, KPMG Acuity.

The need to make their businesses truly customer – and citizen – centric came fifth in the list of business challenges, closely followed by concerns over cost competitiveness, as the second annual KPMG business report, Keeping us up at night shows.

Gary Wingrove, CEO of KPMG Australia said although respondents were asked to name their top five issues, broader recurring themes were revealed which cut across specific concerns, industries and size of business.

“Most marked was a shift in focus on the customer as top of mind, compared to last year. Organisations know they have to genuinely put the customer first heading into 2019. This is no longer an aspirational value, but a hard reality that needs to be baked into any organisation’s culture and planning,” he said.

KPMG Chairman, Alison Kitchen added rust is undoubtedly the other key permeating issue this year.

“No longer some woolly discussion point, trust has burned its way into the consciousness of senior leaders and is increasingly being recognised as the license to operate. As a result, organisations are asking themselves fundamental questions about their purpose, their culture, and how they present themselves to the world.”

The top issues were:

1. Digital Transformation

Ian Hancock, KPMG National Managing Partner, Management Consulting, said: “Just about every CEO has ‘digital transformation’ at top of mind but it can mean different things. In 2018, the term ‘digital transformation’ means so many things there is a very real risk that this lack of clarity is causing confusion, leading to diverse agendas and ultimately missed opportunities.”

“Digital transformation includes investments in digital technologies, but also spans the modification of an organisation’s functions, its ways of working, its back office technologies – and occasionally forging a completely new business model. True transformation should also include culture – often the poor cousin behind the more visible technology investment.”

But as Ian explained, the key to any digital transformation worth its salt is connection:

  1. Connect to customers and employees with compelling value propositions, opportunities and interactions.
  2. Connect and empower employees to deliver on the customer promise.
  3. Connect your front, middle and back offices to execute the customer growth agenda.
  4. Connect channel and business partners to jointly deliver on commitments to customers.
  5. Stay connected to market dynamics and digital signals.

“CEOs often tell us they struggle to cope with the pace of technological change – but the vast majority also see it as their major opportunity. They know they are being measured on their ability to deliver against a transformation agenda. As organisations head into 2019, opportunities for digital transformation abound,” he said.

2. Innovation and disruption

James Mabbott, Head of KPMG Innovate, said: “The fear of disruption, at its most elemental level, is straightforward: the constant worry that your competition will use new tech and methods to do what you are not. But as we look toward 2019, we see the dilemma is actually more immediate, more tangible, and more complex.”

“One reason for this is the current global marketplace has made it abundantly clear that the network effects of the innovation race tend toward winner-takes-all. There are spectacularly outsized growth opportunities for the lucky few – and the potential to get left in the dust for everyone else. This raises the stakes enormously.”

James added: “In 2019 a response cannot be as simple as rushing headlong into big new innovative tech and organisational practice. That’s because the population has developed a general sense of scepticism about whether the benefits of ‘innovation’ and ‘disruption’ are really for them, or rather for a small elite who can generate an outsize payoff. So any business leader looking to prosecute an aggressive innovation agenda will likely be met by stakeholders wary about what this actually means for them, including employees. Companies need to grapple not only with the substantial changes themselves but, crucially, how they are communicated.”

3. Regulation

Third place in KPMG’s survey came regulation. This covered both the sector-specific regulations facing the financial services industry and the broader challenges of harmonising business regulation; cutting red tape; and concerns over the capacity/capability of Australia’s regulators.

Astrid Raetze, Partner, KPMG Law, said: “Respondents in the financial services industry are anxious about the prospect of a post-Royal Commission regulatory overload, given what has been identified at the Hayne Commission during 2018. The Commission has already suggested the newly-introduced Banking Executive Accountability Regime (BEAR) could be extended and has flagged potential new regulation around mortgages, credit cards, and insurance contracts.”

“But the expected regulation avalanche goes well beyond the Royal Commission, and banks.
ASIC will be given greater enforcement powers as well as riding orders to move away from its existing preference for negotiated outcomes over civil proceedings. More prescriptive ASX guidelines will also come into play, including a key change to a company’s obligation to “act ethically and responsibly” to instead “instil the desired culture” in the organisation.

“It is important to take a positive stance towards regulation. Regulation can be a spur to business improvement, and an opportunity for differentiation in the eyes of customers and the market.”

Outside financial services, there are wider concerns amongst business leaders that regulation is already voluminous and complex.

Astrid said: “While we don’t wish to see needlessly bureaucratic demands on business, there is a danger of seeing new regulation as purely negative. Reporting can be a strong discipline to get things done, so we would urge businesses not to take their eyes off the ball and get into a defensive mindset if additional regulations are introduced in their sectors, or generally in 2019.”

4. Political paralysis

Fourth on the list of issues worrying business leaders was the ongoing political log jam at Canberra. There was uncertainty over the prospect of significant reforms or necessary changes, and a lack of belief that Australia’s major parties can work cohesively on national agenda items.

Grant Wardell-Johnson, KPMG Partner, Geopolitics and Tax, said: “Business leaders are concerned with growing political polarisation and the difficulty of gaining support for complex reforms. This is perceived to hang over many other issues we face and have a long term detriment for Australia. In a world where we should be less ideological and more evidence and scientifically based in our public policy processes, the opposite seems to be occurring. This leads to less bipartisanship. Now more than ever we need full, frank and fearless advice from senior public servants.”

“As an example, many CEOs referred to energy policy as an indicia of political paralysis. The problem was a trilemma – price, stability, environment – but political discourse could not deal with the three issues and it drifted to one of the three depending on the political perspective. As a country we have to overcome this problem and start relying on evidence-based policy.”

5. Customer centricity

Customer not only came fifth in our list – but was the issue that permeated almost every other answer. It came up in responses ranging from regulation – where it needs to be seen through a lens of driving a closer connection of trust with your customers – to big data, where the real issue, said respondents, was ensuring every sector in the business has a plan to collect and deploy its data to create real value for customers.

Paul Howes, KPMG Partner-in-Charge, Customer, Brand & Marketing Advisory, said: “In most sectors, the customer has traditionally occupied a pretty weak bargaining position – weak on knowledge, access to information, and on options. As a result, most organisations have not considered them first-order priorities. When companies have devised their forward-looking business plans they have often drawn them up in isolation from considerations about the impact on customers.”

“This is all changing – organisations know they have to genuinely put customer first. Many will view a huge part of this as digital transformation – but digital is an enabler, not an outcome, and there is a trap of falling into a tech-first approach. Successful outcomes put the customer at the centre and respond to a human need. Customers talk about outcomes, not necessarily service delivery models. They want the right mix of face-to-face human interaction and automation.”

“And it’s not easy. We undertook an in-depth study of close to 2,000 Australian customers as part of the 2018 KPMG Acuity Customer Needs survey. The top line result we got was both very clear and very unhelpful: customers want to pay less. This applies across sectors. So satisfying your new boss, the customer, is much more than asking them what they want and giving it to them.”

“The companies that truly get it are those who understand there is no silver bullet. These companies understand they need to have engaged, helpful people delivering outstanding service. That these people need to be working in alignment with a great digital experience. And that it is this combination that drives loyalty, advocacy, and commercial performance.”

6. Cost competitiveness

Issues raised by respondents were varied and extensive – the rising costs to employers of energy, raw materials, taxes and government charges and interestingly, labour costs, including wages – despite the fact that many workers are aggrieved their pay has remained stagnant for years now. Award and penalty rates are a live issue at the smaller end of the business scale.

Brendan Rynne, KPMG Chief Economist, said: “Productivity growth has been a long-running challenge in Australia, with limited signs of it improving. Analysis by KPMG Economics has shown we suffer from poor labour cost competitiveness, particularly in the manufacturing sector, where labour costs typically represent between 40 percent-60 percent of the cost base.

Compensation costs in Australia have been growing faster than the value achieved for the output. While the recent experience of wage stagnation in Australia has meant that labour costs have relatively decreased, this low wage growth phenomenon appears to be occurring across many jurisdictions – which means our global competitiveness may not have necessarily increased compared with other countries who have also experienced soft labour market returns.”

“At the higher end of the scale, tax costs and tax rates are also a problem. While corporate rates are falling in some countries (though not all), in Australia this has seemingly been kicked into the political long grass. This clearly acts as another cost burden to Australian businesses,” he said.

Other responses

The remaining top concerns – rated in their top five by at least 5 percent of respondents – were:

7. Public Trust
8. Cybersecurity & Data Privacy
9. Big data
10. Infrastructure and liveable cities
11. Energy
12. Government efficiencies
13. Climate change
14. Health, aged care and disability
15. Education and changing nature of work
16. Fiscal sustainability

Receiving less than 5 percent rating were the challenges of trade & protectionism; tax reform; social cohesion & inequality; affordable housing; defence & security; and Indigenous engagement.