Digital Transformation Project Report

Public Channel / IT Whitepaper

Digital Transformation:
The Age of Innocence, Inertia or Innovation?

We have arrived at a significant moment in time – the dawn of the fourth industrial revolution. This new era builds on the landmark breakthroughs of the technological age that began in the middle of the 20th century – mass scale computing, unprecedented processing power, computer storage, the rise of the internet, etc. – by blurring the lines between physical, digital, and biological frontiers. It will fundamentally alter the way we live, work and relate to each other. 
Capitalising on this phenomenon is the key to innovation and growth. From the rise of AI, machine learning, chatbots and the Internet of Things, to the mountains of data, mixed reality and the next frontiers, the challenge for businesses will be to harness the disruptive force of technology to shape their own destiny. Naturally, this comes while navigating the expectations of a changing workforce, addressing evolving cybersecurity threats, and managing a host of other challenges.
In response, companies are embarking on digital transformation journeys that are creating huge opportunities. But digital transformation is not simply about technology. This transition to the fourth industrial age is shaping entire business strategies. Indeed, this study reports that nearly half of all UK leaders believe that their business models will cease to exist within the next five years. The threat of disruptors entering new markets and reshaping entire industries is also very real with more than half of all organisations expecting disruption to impact their industries within the next two years. These are core business challenges requiring urgent attention.
So, disruption is very real and heading straight for us. How will businesses and other organisations react? They will need to fully grasp the concept of digital transformation and its potential to more effectively engage customers, empower employees, optimise operations and transform products and services. This report suggests that many organisations are still limiting the scope of their digital transformation strategies to customer experience and operational processes. This is a missed opportunity – digital transformation should be regarded as a transformation of business culture in a digital age. This requires leaders to re-envision entire business models and embrace a different way of bringing together people, data, and processes to create value for their customers. But how do you transform for success in the future while running your business today?
That’s the key objective for this report – to better understand how UK organisations are thinking about disruption and their own digital transformation journeys. I’d like to thank all those who have played a role in producing it, particularly the research participants and respondents who have provided the real-world views and insights on which this report is based. I hope you find it a valuable guide for your own digital transformation journey.

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2.

1. Digital Transformation: The Age of Innocence, Inertia or Innovation?

3. We have arrived at a significant moment in time – the dawn of the fourth industrial revolution. This new era builds on the landmark breakthroughs of the technological age that began in the middle of the 20th century – mass scale computing, unprecedented processing power, computer storage, the rise of the internet, etc. – by blurring the lines between physical, digital, and biological frontiers. It will fundamentally alter the way we live, work and relate to each other. Capitalising on this phenomenon is the key to innovation and growth. From the rise of AI, machine learning, chatbots and the Internet of Things, to the mountains of data, mixed reality and the next frontiers, the challenge for businesses will be to harness the disruptive force of technology to shape their own destiny. Naturally, this comes while navigating the expectations of a changing workforce, addressing evolving cybersecurity threats, and managing a host of other challenges. In response, companies are embarking on digital transformation journeys that are creating huge opportunities. But digital transformation is not simply about technology. This transition to the fourth industrial age is shaping entire business strategies. Indeed, this study reports that nearly half of all UK leaders believe that their business models will cease to exist within the next five years. The threat of disruptors entering new markets and reshaping entire industries is also very real with more than half of all organisations expecting disruption to impact their industries within the next two years. These are core business challenges requiring urgent attention. So, disruption is very real and heading straight for us. How will businesses and other organisations react? They will need to fully grasp the concept of digital transformation and its potential to more effectively engage customers, empower employees, optimise operations and transform products and services. This report suggests that many organisations are still limiting the scope of their digital transformation strategies to customer experience and operational processes. This is a missed opportunity – digital transformation should be regarded as a transformation of business culture in a digital age. This requires leaders to re-envision entire business models and embrace a different way of bringing together people, data, and processes to create value for their customers. But how do you transform for success in the future while running your business today? That’s the key objective for this report – to better understand how UK organisations are thinking about disruption and their own digital transformation journeys. I’d like to thank all those who have played a role in producing it, particularly the research participants and respondents who have provided the real-world views and insights on which this report is based. I hope you find it a valuable guide for your own digital transfor mation journey. Foreword Dr Nicola Hodson, General Manager, Marketing and Operations, Microsoft UK

17. 13

45. 41

53. 49

6. 1. Digital Transformation Perceptions 2

27. As we identified earlier, the recognition of the task at hand for financial services organisations could be one of the reasons why they are more likely to have digital leaders in place. What is of more concern is the absence of digital leaders in sectors that are often driven by technical innovation and data. Does your organisation have any senior digital leader roles in place? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIO and IT leaders % of respondents Yes, one or more Yes, one or more No, though planned/considered No, though planned/considered Don’t know Don’t know No, not currently No, not currently 61% 45% 42% 36% 38% 12% 10% 12% 10% 10% 13% 16% 21% 36% 20% 14% 29% 24% 19% 32% 11% 20% 23% 46% 63% 12% 14% 11 % 23

12. 2. The Case for Digital Transformation 8

14. The previous question demonstrated that the threat of disruption is real. This question shows many organisations believe it is going to happen very quickly. Half of all respondents expect sector disruption to some degree in the next two years, with financial services respondents demonstrating the highest level of anxiety (65%). Given recent changes to the UK economy it’s surprising to see a relative lack of concern from those in manufacturing (27%), which could suggest they are confident they already have the business models in place to succeed in the future. How disrupted do you think your industry sector will be, in the next 2 years? Where will the biggest disruption impacts come from? Financial Services Financial Services Retail Retail Other Services Other Services Manufacturing Manufacturing Public Sector % of respondents % of respondents (private sector only) Significantly Established companies from own sector None – we see ourselves as a disruptor None – we see ourselves as a disruptor Established companies from adjacent sectors New entrants Moderately Not significantly disrupted Too early to say Don’t know Don’t know 19% 27% 46% 33% 28% 17% 13% 14% 19% 26% 4% 7% 10% 19% 8% 16% 9% 17% 9% 15% 34% 39% 10% 30% 18% 12% 28% 36% 13% 22% 10% 25% 38% 16% 56% 9% 41% 9% 33% 16% 3% 3% 4% 6% 6% 8% 4% 6% 8% 10

30. 5. Technology 26

34. 6. People 30

48. Conclusion 44

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20. Amongst those who stated their organisations have a strategy in place, the majority have had a plan in place for 2 years or more, with a significant minority stating their plans have been in place for over 4 years. At first this may seem surprising – but take into consideration the earlier focus on customer experience and operational efficiency. In this context this time line would seem more understandable. But it begs the question as to whether respondents truly understand the full impact digital transformation programmes can have across the entirety of their organisations. To date, have they simply been pursuing a strategy of ‘Digital Transformation Lite?’ Notably, the CIOs and IT leaders feel more confident about the existence of a digital transformation plan than business leaders. Possibly the CIOs or IT function have a better sense of the technology-driven threats and opportunities – or do they think that their IT strategy equates to their organisation’s entire digital transformation strategy? How long has a digital transformation programme been in place? Financial Services Retail Other Services Manufacturing Public Sector % of respondents (those with a digital transformation strategy) In place, but yet to start Less than one year 1-2 years 2-3 years 3-4 years Over 4 years Don’t know 5% 8% 8% 13% 28% 19% 16% 20% 19% 29% 11% 16% 13% 8% 5% 13% 28% 24% 16% 16% 10% 15% 20% 22% 15% 9% 10% 15% 12% 20% 27% 4% 7% 16

26. In an era of great market disruption, it’s a real concern that almost half of business respondents feel that their leadership is unwilling to disrupt their own business in order to grow and be more competitive in the future. This suggests a high degree of indifference and inertia. Traditional business models effectively condense decision-making to a handful of people. As such, it’s important to choose these people wisely. The survey data suggests that in the digital era, this is not necessarily happening. There is a high percentage of senior leadership teams who are not perceived as digitally literate. This implies that many of our leaders in the UK today may be leading their people on a path that is increasingly deviating from the reality of the market today. There is a clear discrepancy between the CIO and IT leaders and business leaders as to whether they have a digitally literate leadership team. Possibly they are judging digital leadership on their IT skills, rather than a broader digital competence? In any case, the level of apparent digital illiteracy is significant, particularly given the extent to which our focus sectors are so data-driven. It’s also interesting that only 35% of public sector respondents believe they have a digitally literate leadership team when concepts such as e-government and transformational government have been around for more than a decade. This highlights some of the systemic problems faced by public sector organisations in embracing digital transformation. Is your leadership team willing disrupt existing businesses? Financial Services Retail Other Services Manufacturing % of respondents (private sector only) Strongly agree Strongly disagree Agree Don’t know Neither agree/disagree Disagree 17% 39% 21% 10% 4% 4% 8% 13% 42% 18% 11% 11% 14% 33% 19% 15% 14% 5% 12% 42% 14% 13% 4% 13% 22

28. Who does the most senior digital leader report to? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIO and IT leaders % of respondents (those with one or more senior digital leader) CEO, MD or equivalent CEO, MD or equivalent CFO/Finance leader CFO/Finance leader CIO CIO CMO/Marketing leader CMO/Marketing leader COO/Operations leader COO/Operations leader Don’t know Don’t know IT leader (non-CIO) IT leader (non-CIO) Other function Other function 51% 47% 47% 39% 52% 11% 15% 13% 3% 6% 7% 8% 9% 18% 2% 3% 6% 3% 15% 2% 2% 4% 6% 4% 2% 4% 3% 3% 2% 11% 6% 3% 6% 4% 13% 14% 13% 27% 15% 53% 7% 6% 4% 4% 3% 7% 15% 42% 25% 19% 5% 1% 4% 5% For those organisations that have digital leaders in place, it is healthy to see that many report into the CEO. But the trend needs to accelerate so that the digital transformation strategy becomes the business strategy, and thus the CEO becomes the owner. The level of ‘don’t knows’ is significant. It suggests that for many, digital transformation is an isolated project happening somewhere else in the business. There is a large discrepancy between business leaders and CIO and IT leaders as to where digital leaders sit within their organisation. While 44% of respondents with IT responsibilities see the leadership sitting within their team, only 13% of business leaders agree. 24

38. 7. Progress 34

52. Appendix A Industry Summaries 48

13. This section looks beyond the high-level vision and attempts to identify the drivers that have triggered digital transformation initiatives. Nearly half of all business leaders think their business model will cease to exist within the next 5 years. This is a sobering thought. When you consider the scale of the organisations surveyed, this suggests real change is coming to major parts of the UK economy. However, there are some respondents who believe their own organisation’s business model will outlive the sector model. These people might well be in disruptor-organisations. Or they might be oblivious to the reality that their very own ‘Kodak moment’ is imminent. How long does your current business model have left to run? Financial Services Retail Other Services Manufacturing % of respondents (private sector only) No more than 2 years Between 2 and 5 years Between 5 and 10 years At least 10 years Indefinitely Don’t know 14% 15% 15% 7% 23% 10% 11% 13% 36% 27% 16% 15% 12% 16% 24% 15% 14% 18% 14% 32% 18% 16 % 12% 9% 9

18. 3. Strategic Approach 14

22. Whilst it is encouraging to see that the majority of respondents view digital transformation as an organisation-wide initiative, there is some cause for concern that a large proportion do not view this strategy as extending to their supply chain, customers or end-consumers. No organisation is an island and each of these play a crucial part in its ecosystem. If its rate of change is not matched by those surrounding the organisation, much of the potential value digital transformation can bring will be lost. How broadly does your digital transformation strategy extend or apply? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIO and IT leaders % of respondents (those with a digital transformation strategy) For one or more functions/depts For one or more functions/depts Organisation-wide, internally Organisation-wide, internally Both internally and externally Both internally and externally Don’t know Don’t know 11% 13% 13% 45% 44% 49% 38% 38% 38% 6% 5% 53% 42% 5% 3% 45% 38% 3% 9% 47% 39% 5% 15% 36% 47% 2% 18

43. We asked leaders whether they think they’re ahead or behind their peers in terms of digital transformation. It is a relief to see there is some degree of caution in terms of declaring their organisations as being significantly ahead in respect of digital transformation. Given the issues flagged in this report, we might expect the ‘behind’ brigade to be much larger. But with the lack of a common definition for digital transformation, this may be more based on gut feeling than underpinned by any real benchmarking. More worrying is the significant minority of leaders who say they have no perception of where they sit in respect of their relative progress. These people might appear hermetically sealed from the cold winds of global digital reality. Do you think you’re ahead or behind, in terms of digital transformation? Financial Services Retail Other Services Manufacturing Public Sector % of respondents Significantly ahead Commercial sectors asked relative to ‘existing competitors in your industry sector’ Public Sector respondents asked relative to ‘other UK organisations in your sector’ Somewhat behind Somewhat ahead Significantly behind Don’t know Neither ahead nor behind 7% 5% 4% 3% 1% 35% 28% 31% 16% 25% 30 % 18 % 26 % 20 % 39 % 9% 15% 15% 15% 18% 14% 27% 16% 33% 13% 5% 7% 7% 14% 5% 39

24. 4. Leadership 20

25. If digital transformation strategies are to move from infancy to maturity, a digitally literate leadership team is vital. Given the short lifespan that many respondents perceive their current business models have left to run, the need for leaders to make the right strategic decisions that will keep their organisations competitive in ever more disrupted markets are paramount. So do organisations currently have appropriate leaders in place to make these decisions? Does your organisation have a digitally literate senior leadership team? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIO and IT leaders % of respondents Strongly agree Strongly agree Strongly disagree Strongly disagree Agree Agree Don’t know Don’t know Neither agree/disagree Neither agree/disagree Disagree Disagree 16% 14% 12% 13% 7% 43% 24% 32% 28% 28% 16% 21% 17% 21% 28% 13% 17% 18% 17% 15% 4% 12% 8% 8% 9% 8% 12% 14% 13% 14% 14% 29% 20% 17% 8% 12% 17% 51% 12% 10% 7% 4% 21

46. 8. Society 42

64. Appendix B Methodology 60

16. The relatively low focus across all sectors on employee empowerment is a concern. Organisations that place employee empowerment at the heart of their business transformation will naturally attract and retain the best talent, who in turn will deliver the best customer experience, devise the best products and identify the most innovative ways to optimise business models. The ranking of ‘first mover advantage’, whilst seemingly low, could have a strategic impetus behind it. Being first in market at the expense of being the best is no longer a model for success in a world where immediate feedback and unparalleled choice have given power back to the user . So what do our digital transformation leaders think : ‘We believe our industry is ripe for disruption. We are concerned about potential threats. Though we work in a very traditional market, and so we see ourselves as sitting on a smouldering platform. That said, we are urgently looking at ways in which we can convert the data generated by our interventions into customer value. Our vision is to be a data- driven organisation’ Digital Transformation Director, UK and Global Engineering Consultancy ‘All the big players are reading from the same book. So disruption is likely to come from a new player. Over 50% of our revenues come from maintenance. Should clients choose to outsource the associated analytics to an organisation better placed in respect of data scientists, then we could see the guts of our business going elsewhere’ Global Head of Strategy and Architecture, UK and Global Aerospace company To conclude, there appears to be a split among respondents. Around half understand there are drastic changes on the horizon but half seem to believe it isn’t happening anytime soon. For some, they feel like we live in an age of urgency, for others it seems to be an age of innocence. So how do these overarching perceptions of disruption translate to the overall strategic intentions of the respondents’ organisations? 12

40. For those organisations embarking on acquisitions and joint ventures, the most common cited drivers are to generate new sources of revenue and to gain digital technology. Relatively few see elimination of potential competitors, or to act as a hedge against possible disruptors, as key reasons. It is notable that up to a fifth of leaders in commercial organisations say they simply ‘don’t know’ whether any of these actions are taking place – even higher amongst those in the public sector. Might this be due to poor communications, or are they just not seeing the benefits? What are the main reasons for acquisitions or joint venture activity? To generate new revenue streams To gain digital technology to apply to existing business To acquire digital skills (people) To survive as a business/organisation To eliminate potential competitors/disruptors To act as a hedge against possible disruptors 42% 41% 30% 24% 17% 16% % of respondents (those who mentioned acquisition/JV activity) 36

10. When our survey asked what other words or statements that come to mind, top mentions included not only opportunity but also future, customer, positive, necessary, essential and priority. It’s interesting to see ‘costly’ as the highest negatively associated word. Digital Transformation should be seen as an investment in an organisation’s future rather than a cost to be kept down. However, the term ‘digital’ can all too often be seen as synonymous with the IT department alone. If not viewed as an organisation-wide investment and purely associated with one cost centre, digital transformation programmes are likely to be stunted before they have a chance to deliver the true value they are capable of delivering to organisations. Here are a couple of perspectives shared by those leading the digital charge: ‘We see digital transformation as a process involving the automation and refining of processes to deliver better services to clients and candidates. It also offers the opportunity to widen our reach and connect through a variety of channels. It enables recruiters to deliver value through good data-driven intelligence. The days of cold calling are over!’ UK Managing Director, Professional Talent Recruitment company ‘Digital is simply a lever in the toolkit for improving the experience of both the staff and the customers. It is an opportunity for us to repurpose existing market solutions, rather than reinvent the wheel in-house. Our big focus is on people and not technology’ Head of IT Partnership Management, UK Utilities company In conclusion, the perceptions of digital transformation are aligned to customers and operations. While this is quite natural, organisations need to consider the broader implications of digital transformation and how it can impact all aspects of an organisation, from empowering employees, to transforming products and services, and creating new business models for evolving markets. 6

21. Looking at where the digital transformation strategy originates, there is a strong sense that it comes from the top. But the influence that the IT department has to play is a source of dispute – 31% of CIOs and IT leaders believe their department has been instrumental in the development of strategies compared to just 6% of business leaders. In respect of the outlier originators, there has been a perception for some time that Marketing is the driver of digital strategy and as such, the CMO has been seen as a suitable candidate to lead the digital charge. Its relatively low level of representation may therefore seem surprising. However, it is important to distinguish between digital strategy and digital marketing as they ar e not one and the same. Where does the digital strategy originate? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIO and IT leaders % of respondents (those with a digital transformation strategy) Board-level Board-level Finance Finance Senior leadership (below board) Senior leadership (below board) Marketing Marketing CIO or IT dept. CIO or IT dept. Other function Other function Operations Operations Don’t know Don’t know 58% 52% 56% 51% 62% 26% 19% 19% 30% 25% 5% 10% 3% 3% 15% 16% 9% 2% 5% 13% 5% 61% 23% 6% 6% 48% 17% 31% 2% 17

42. Amongst public sector respondents, budget constraints are cited most often as a potential barrier (note, we did not present this response option to respondents working in private sector organisations). While budgetary pressures are clearly important and very real, it’s possible some leaders in public sector organisations see digital transformation more as a cost than an investment. It is interesting to see that organisations in the public sector feel relatively unburdened by legacy systems, given that some were amongst the earliest adopters of large-scale custom IT systems. What are the potential barriers to successful digital transformation (public sector)? Budget constraints Unwillingness to radically rethink how we operate Slow decision-making or excess caution Privacy/security considerations Lack of agility in IT infrastructure/operations Too much focus on pure technology Unwillingness/inability to change culture Unable to attract talent Legislative and regulatory considerations Lack of senior management sponsorship Investments in legacy systems Knowing which digital trends to respond to None of these or Don’t know 38% 16% 34% 15% 26% 14% 22% 11% 18% 10% 9% 1% 5% % of respondents (public sector only) 38

66. Other Service sectors includes consulting and advisory services, scientific and technical services, transport and logistics, hospitality and recreation, private sector health and education, arts and entertainment. The remaining ‘Other sectors’ group includes energy, utilities, IT/telco, charities and non-profit organisations. Microsoft also conducted a number of in-depth interviews with leaders in UK organisations during September and October 2016. These included CEOs, CIOs and other C-level executives, along with other senior digital transformation stakeholders within their respective organisations. Due to rounding some percentage totals presented in this report may not sum to 100%. Survey respondents by function Survey respondents by organisation size (UK employees) COO/Operations 500 -999 CIO/IT 1000 - 4999 Customer Service/Support/Experience Sales 5000 or more R&D or Engineering CFO/Finance HR/People Professional or Technical Services CMO/Marketing Other functions 18% 14% 17% 32% 7% 10% 54% 6% 10% 5% 8% 5% 13% 62

33. When it comes to the security of cloud services, there is a significant disparity between the private and public sector. Almost three quarters (70%) of commercial organisations believe cloud services to be at least as secure as their in-house systems. This drops to 43% for respondents in the public sector which has the highest number (38%) believing that their in-house systems are more secure. Recent moves to the cloud by major government departments would suggest a growing confidence in cloud security but the message is yet to permeate throughout the sector. In conclusion, the use of big data and analytics and cloud technologies is expected to continue growing across all sectors in the years ahead. However, what is clear is that many organisations are starting to experiment with newer innovations such as VR and AR, chatbots and machine lear ning. These technologies are often associated with startups who lead the charge on experimentation and establishing new business models. But the respondents to this survey represent much larger organisations and they are clearly keen to explore the value these nascent technologies can deliver. Perhaps there is a desire to counter the threat of disruptors after all. Do you think the security of cloud services available in the UK today are better or worse than your existing in-house systems? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIO and IT leaders % of respondents (those without any in-house systems excluded) Probably better than in-house Probably better than in-house Probably just as good as in-house Probably just as good as in-house Don’t know Don’t know Probably worse than in-house Probably worse than in-house 22% 38% 24% 17% 31% 28% 13% 28% 19% 44% 19% 18% 17% 35% 23% 25% 18% 25% 38% 20% 19% 35% 23% 22% 25% 46% 24% 5% 29

44. What do our transformation leaders think? ‘In taking our digital journey, we have learnt that the trick is in getting the correct balance between local and global initiatives. And to avoid trying to do everything yourself ’ UK Managing Director, Professional Talent Recruitment company ‘We have very clear goals and deadlines. Digital transformation is not an activity that will just roll on and on. We see it as a project that underpins our goal to double in size by 2021’ Digital Transformation Director, UK and Global Engineering Consultancy The findings in respect of progress suggest that whilst many organisations have embarked on a digital transformation journey, the extent to which they are braced for radical change appears relatively low. There is a sense that many organisations are tinkering around the edges of their business model. Possibly this is a characteristic of short-termism. A CEO who boosts the share price because their customers are delighted with the new mobile app will be rewarded accordingly. The CEO who realises that the changes required need to be profound may be sacrificing their own track record to make their successor appear the hero. It’s likely we will witness a number of digital transformation resets before many organisations’ plans reflect the deep business reengineering required to thrive in the fourth industrial revolution. 40

36. We asked respondents about how attractive they think their workplace is for Millennials. For the purposes of the survey we defined this as people between the ages of 18 and 35. By this definition, Millennials already represent over a third of the UK workforce. A significant percentage seem to believe they have this nailed. Only around 20% of those in commercial organisations think their workplace is less attractive than average, though this rises to more than 25% amongst those in the public sector. The top reasons cited by those who say they are Millennial-friendly include flexible working, a good career path & prospects, pay & benefits, use of the latest technology or being ‘a digital company’, culture and being an ethical and responsible employer. A significant number also say they have specific initiatives to engage and recruit younger workers, or that they have a strong graduate and apprentice recruitment programmes. For those who think their workplace is less attractive than average the top r easons cited include being in an unglamorous industry sector, or the perception of being somewhat old-fashioned and unexciting. Other top mentions include being behind on technology, organisational inflexibility, and being cautious and risk- averse. Some respondents also mentioned lack of flexible working options or poor work/life balance. Is your organisation more or less attractive than the average UK workplace, for Millennials? Financial Services Retail Other Services Manufacturing Public Sector % of respondents Definitely more attractive Definitely less attractive Probably more attractive Don’t know About average Probably less attractive 13% 17% 18% 17% 9% 32% 20% 27% 30% 22% 29% 28% 29% 24% 31% 16% 13% 14% 12% 16% 5% 10% 4% 10% 10% 5% 13% 8% 7% 11% 32

37. Here are some more enlightened perspectives : ‘We recognise the value in young talent, what with their unconstrained perspectives. This does need to be tempered with experience of the older workers. Nonetheless, their thoughts are generally considered to be of high value’ Digital Transformation Director, UK and Global Engineering Consultancy ‘We are well placed to witness what constitutes talent management best practice. Money is a short term incentive. Flexibility in how people work is highly valued. People also appreciate the investment our organisation makes in terms of their professional development’ UK Managing Director, Professional Talent Recruitment company To sum up, in some instances there appears to be a real gap between best practice and actual practice. Organisations that do not recognise the importance of employee empowerment have probably not made the mindset transformation required to operate in the digital economy. This puts those have made the leap at a strong advantage. And given that the talent pool is in short supply, this will put the long-term prospects of the old school players into question. 33

29. What do our digital leaders say? ‘Our leadership is getting there in respect of digital savviness. There is an active programme in place to help our leaders keep abreast of trends. We see digital not so much as a role, but more of a leadership competence. Our leaders need to balance risk taking against the needs of a very conservative customer base, that is typically look forward in terms of 20-year time horizons’ SVP UK Sales, Energy Management company ‘The company is quite risk-comfortable. This is reflective of the youth of the organisation – average age 30 years old. However, we have become slightly less risk-comfortable, given the economic uncertainty. But we recognise that this is the new normal’ UK Managing Director, Professional Talent Recruitment company In summary, it’s encouraging that many organisations have both a digitally literate leadership team and digital leaders working at board level. However, it’s still a concern that a large proportion of those organisations are unwilling to disrupt their own businesses to grow and compete in the future. So despite a belief that digital literacy exists at leadership level, is there still a lack of understanding about the full role technology can play in the transformation of a business? 25

32. We then asked which of these technologies the organisation was actively using or experimenting with. Again, there is no surprise that analytics & big data, and cloud, lead the way, given the relatively mature nature of these technologies. However, it is surprising to note that the retail sector does not have the same appetite as financial services in this respect. VR and AR have the potential to significantly upgrade the customer experience and worker pr oductivity. It is surprising to see the public sector leading the charge in this respect. Smart digital assistants and bots can also provide an enhanced customer experience, yet the public sector is the least active in this space. The power of algorithms have long been recognised by banks and other financial services companies so it is perhaps unsurprising that respondents displayed an increasing interest in machine learning over the next three years. However, it is surprising to note the retail sector’s indifference, given its power to predict consumer behaviour and thus its ability to enable forward-thinking retailers to anticipate and capitalise on evolving consumer habits. Which of these is your organisation actively using or experimenting with? Financial Services Retail Manufacturing Public Sector Other Services Analytics/ Big Data 0% 10% 20% 30% 40% 50% 60% 70% Cloud Computing Internet of Things (IoT) Sensors and M2M AI and machine learning Smart digital assistants/bots VR/AR Robots 3D printing % of respondents (don’t know excluded) 28

9. Perception of digital transformation, Business vs. CIO/IT Customer-facing technology initiatives Technology enablers across the organisation Technology innovation/ experimentation General overhaul of the business model Data, analytics and IoT initiatives Synonymous with IT/IT dept Employee empowerment/ collaboration None of these or Don’t know 43% 36% 35% 42% 19% 25% 17% 13% 15% 24% 12% 20% 10% 12% 18% 6% Business leaders CIOs and IT leaders A sign that the IT function is, at last, blending into the organisation is the relative similarity in response from the business and IT functions. Smart CIOs align their KPIs with those of the boardroom. It is good to see that many see digital transformation as an opportunity. 5

19. For an organisation to achieve its vision, it must have a strategy that realistically reflects what needs to be done, and is woven into the activities and minds of all those involved. The same is true for digital transformation strategies. When it comes to a clear or formal digital transformation strategy, financial services respondents are in a league of their own, with almost two-thirds (64%) stating that such a strategy is in place. This is perhaps understandable given the external threats they perceive are endangering their industry. Even a sector that has such a high degree of regulation and legacy technologies has the ability to innovate if the motivation is there. However, looking more broadly across other sectors, respondents that believe they have a clear strategy in place are in the minority. This is a major cause for concern – such organisations might well be vulnerable if they are not a disruptor or don’t have a plan to avert disruption. Do you agree/disagree your organisation has a clear or formal digital transformation strategy? Financial Services Retail Other Services Manufacturing Business leaders Public Sector CIOs and IT leaders % of respondents (private sector only) Strongly agree Strongly agree Agree Agree Neither agree nor disagree Neither agree nor disagree Disagree Disagree Strongly disagree Strongly disagree Don’t know Don’t know 14% 50% 16% 8% 9% 10% 9% 11% 31% 32% 24% 26% 27% 26% 12% 10% 15% 4% 8% 11% 16% 14% 11% 11% 37% 18% 17% 4% 12% 12% 35% 21% 14% 5% 12% 21% 44% 20% 8% 4% 4% 3% 15

51. Be flexible in both strategy and vision The industrial era was the age of certainty. We could build factories knowing full well that people would likely buy the output for years to come. We are now in the age of uncertainty, so we cannot make such long term assumptions. Therefore, we need to be agile from a business perspective. Sometimes a new opportunity confronts us, and it has such potential that it could well lead to a change of vision. Clearly a change of that nature would not be taken lightly. A potential challenge with being data-driven is that it can flag wher e a rigid adherence to a well-planned strategy appears at variance with the opportunities staring an organisation in the face. That can be irritating if the leadership team has fired up the organisation to adhere to the strategy. But irritated and wildly successful trumps oblivious and defunct. Embrace the cloud Embracing the cloud is not the risk it once was. Many established or ganisations have been running their business on it for years. By doing so they can free up the cognitive capacity of their IT function to focus on matters of higher value. Cloud services enable organisations to service employees, customers and other stakeholders on the device of their choice. Similarly, it allows people to engage when and where it suits them. It is sometimes said that all companies are in the technology business in the fourth industrial revolution. This is not necessarily true. All companies are in the information and insight business. Let someone else worry about the technology infrastructure. Experiment with new business models Nobody can safely say that their existing business model is futur eproofed. Therefore, organisations should always be experimenting with new business models. This needs to be a parallel exer cise. It’s a little too late to start exploring new business models when the current one has bit the dust. Business leaders today need to think of themselves as portfolio business leaders. The better their portfolio coverage the more likely they will have a successor should their primary business fail. Be a bit more paranoid The day business leaders start to believe their businesses are bulletproof is the day they take their eye off the market. Perhaps don’t think of it as paranoia, because there actually are companies looking to eat your lunch. It’s not always personal. Their aim is to take out your whole sector. So, again, it is imperative to watch the market at all times. Industrial era certainty has gone forever. Finally, the world is changing all around us. Very few of us have time to observe what is happening and to then reflect on how we respond. It is easier to just press on with the well-trodden path. We need to develop the mindset of the Nordic skiers. They know where they want to get to, but if they spend all their time looking at the ground driving themselves forward they may look up to find they are way off course. The smart skiers look up every ten or so steps. In an increasingly stormy market, we would do well to follow this approach. 47

50. Next steps So what lessons should we take away from these findings? Below we present some areas for consideration if organisations are to give their digital transformation journeys the best possible chance of success. Understand what is driving the need for change There are certain macroeconomic trends that are impacting the world we live in. Hyper-connectivity brought about by new technology has a role to play. As does globalisation, changing demographics, energy security, and talent scarcity. The point is to identify what factors affect your market most. It would be wise to take a fuzzy view as to where the boundaries of your market lies. Who is your actual competition, particularly as data is a key element of your value proposition? Who might be your competition tomorrow? Ensure your leadership is digitally competent In order to avoid a ‘blind leading the blind’ situation, having sound digital leadership is key. Keep in mind that this is not something that can be delegated to a role. Digital leadership is a competence that all your senior leadership team should possess. Smart organisations will make it a priority to ensure that their CEO is digitally savvy. Empower your people It makes no sense to have access to a large brains trust, yet utilise them as brainless oxen. That model worked well when we needed people to act as technology placeholder s in the industrial mills. As more people start to align their work with their passions (and of course market demand), they will not need micro-management. They should be given the latitude to be curious, to experiment, to fail, and to thus learn both personally and on behalf of the organisation. Empowered, passionate, and competent people have the capacity to help shape the strategic direction of the organisation. This is not something to limit to a handful of board members. Become data-driven The majority of the most successful organisations within the digital economy are data-obsessive. They will push products and services into the market and study the associated data very carefully. The data will tell them whether they have a winner, where to develop or innovate further, or whether to drop the new proposition altogether. If one thinks of the organisation as a body, developing its senses is critical. Our senses help us as individuals to build a model of the environment in which we operate. These senses help us identify opportunities and threats. Corporates need to develop similar senses. IoT has a role to play here, as does big data, analytics and machine learning. The ability to spot weak signals and act on them might enable organisations to grab a large share of a nascent market, whilst its competitors are oblivious to its very existence. 46

62. Top drivers Slow decision- making Changing culture Optimise operations Lack of IT agility Creating more agile IT Transform products/ services Budget constraints Better customer/ stakeholder experience Top potential barriers Top action taken now Digital transformation in the organisation 61% 38% 36% 51% 34% 30% 36% 26% 25% Public Sector profile (87 UK business and IT leaders) Customer/ stakeholder experience 58

7. To understand where the UK is in respect of digital transformation, we asked survey respondents how their organisation thinks about the concept of digital transformation itself. One immediate observation is the sizable number of respondents who view digital transformation as a customer-facing (42%) or technology enabling (36%) exercise. Sectors such as financial services and retail are operating in hypercompetitive markets, so a relentless focus on the customer, coupled with any marginal gains they can acquire by employing the latest technology, makes sense. However, a cause for concern is the low ranking of employee empowerment. If organisations do not make the connection between digital transformation and their employees making better, smarter decisions then they risk falling behind. In this day and age, younger employees have heightened expectations about what an employer can offer them so those not matching those expectations risks creating a self-imposed skills gap. How the organisation thinks about ‘digital transformation’ Customer-facing technology initiatives Technology enablers across the organisation Technology innovation/experimentation General overhaul of the business model Data, analytics and IoT initiatives Synonymous with IT / IT dept Employee empowerment/collaboration None of these or Don’t know 42% 36% 20% 16% 16% 13% 10% 16% % of respondents (maximum of 2 statements could be selected) 3

31. While technology has long been a core component of the infrastructure of business, in order for it to shape business strategy there has been a real need to translate technical discussions into language the board understands. This has manifested itself in more recent years by reducing the importance of technology competence in the role of the CIO. Business leader first, technology leader second. However, a swathe of new technologies has arrived. All with almost unlimited potential, and most with a price point that makes their commercialisation feasible. There has never been a time when strong technology leadership was so important. Not just in the CIO, but in all the leadership roles. Looking at which technology trends will be most prominent over the next three years, the relative significance of the technologies is generally reflective of their maturity, which is to be expected. However, it’s interesting to note that broadly speaking all the sectors are within a point or two across all technology trends. Where previously we have seen a significant variance between public and commercial sectors, it’s interesting to note that such an innovative and nascent trend such as virtual reality/augmented reality (VR/ AR) is generating as much excitement among public sector respondents as it is among other industries. The fact that financial services are most bullish around the significance of cloud services over the next three years is interesting and indicative of a market where regulatory authorities are continuing to gain trust in the value that cloud services can deliver. How significant do you expect these technology trends over the next 3 years? Financial Services Retail Manufacturing Public Sector Other Services Analytics/ Big Data 2 3 4 5 6 7 8 Cloud Computing Internet of Things (IoT) Sensors and M2M AI and machine learning Smart digital assistants/bots VR/AR Robots 3D printing Respondents rated each technology rated on a 1-9 scale where 1 = ‘not significant at all’ and 9 = ‘extremely significant’. Mean scores shown (don’t knows excluded) 27

65. To understand perceptions and actions around digital transformation amongst large UK organisations, Microsoft conducted a survey over 1000 leaders and executives. The survey was fielded online by YouGov on behalf of Microsoft UK in September 2016. Microsoft was not revealed as the survey sponsor. Analysis of the survey response data was carried out by Microsoft. The survey generated a total of 1013 respondents who met the following criteria: • Employed full-time in an organisation with 500 or more employees in the UK • Working in a UK headquartered organisation, or with a non-UK parent HQ but with significant autonomy and control within the UK-based business or operations • Employed in a senior or middle management position Survey respondents were a mix of business and IT leaders, with the strong majority holding business leadership roles within their respective organisations. Other Service sectors includes consulting and advisory services, scientific and technical services, transport and logistics, hospitality and recreation, private sector health and education, arts and entertainment. The remaining ‘Other sectors’ group includes energy, utilities, IT/telco, charities and non-profit organisations. Survey respondents by sector Financial Services Retail Other Service sectors Manufacturing Public Sector Other sectors 22% 11% 25% 9% 9% 24% 61

35. One of the great ironies of the fourth industrial revolution is that it is not only about technology, but also about people. In a world where technology is ‘on tap’ it will be increasingly difficult to gain a competitive advantage through technology differentiation alone. The difference will come from the creative individuals whose innovative thoughts lead to differentiated services that command a healthy margin in the market. So the logic follows that organisations should be developing and empowering their people to evolve from task-oriented workers to innovators. Whilst organisations are implementing new technologies to improve collaboration and there are efforts in place to drive organisational-wide cultural change programmes, empowering employees and decentralising decision-making ranks worryingly low in the list of actions taking place. Given the fluidity in the market for talent, organisations need to ensure they are meeting the needs of their employees or they will go elsewhere. Indeed, with Millennials now accounting for a significant portion of the UK workforce, it is worth reinforcing they have high expectations in respect of what work offers them, and have no compunction leaving an organisation because the opportunity is better next door. The financial services sector shows a degree of boldness regarding innovation and experimentation. It will be interesting to see how far this can be taken in respect of service innovation in such a heavily regulated industry. % of respondents Is your organisation taking any actions to change the workplace and culture? New technology to improve employee collaboration Empowering employees, less centralised decision-making Don’t know None of these Other Services Financial Services Public Sector Manufacturing Retail New technology to improve external collaboration Organisation-wide cultural change programme More innovation/ experimentation Hiring more people with digital skills/expertise 41% 28% 42% 38% 33% 31% 26% 26% 34% 30% 17% 34% 21% 21% 28% 33% 19% 22% 22% 22% 22% 33% 21% 19% 21% 24% 18% 14% 12% 11% 10% 11% 16% 10% 22% 14% 11% 11% 21% 17% 31

23. The perception that so many leadership teams still rely on gut feeling, which is significantly higher within the public sector that in other sectors, rather than making decisions that are grounded in data and analytics, is alarming. Is this because these leaders have got to where they are largely based on judgement and instinct and so struggle to change habits of a lifetime or is it simply the case that despite the power of data, many organisations still struggle to access good quality data and make sense of it? What do the digital leaders say? ‘In transitioning from products to services, there is always the danger of getting stuck in the middle. In order to avoid that we are running our services businesses as a separate operation to our traditional products business’ SVP UK Sales, Energy Management company ‘Our strategy is driven by the needs of our customers. I actively keep pace with the changing needs of the market by both keeping in touch with our clients and reading up, e.g. via blogs, on what is deemed important by the market’ CEO, UK Creative Design Services company In summary, digital transformation strategies, even when in place, appear to still be in their infancy, with many internally-focused and not data-driven. Perhaps the term ‘digital’ itself is the cause for confusion, with people attaching the term to the IT department and therefore focusing on internal practices. In reality, organisations should be viewing this as business transformation in a digital world. In this context, the need to bring suppliers, customers and end-consumers much more into focus is much more apparent. Are most strategic decisions based on data and analytics? Financial Services Retail Other Services Manufacturing Public Sector Strongly agree Disagree Agree Strongly disagree Neither agree nor disagree Don’t know 8% 7% 8% 8% 10% 32% 38% 31% 31% 25% 30% 22% 24% 27% 20% 9% 14% 12% 11% 10% 4% 7% 6% 4% 13% 17% 12% 18% 19% 22% % of respondents 19

49. The research underpinning this report is the most extensive to date in the UK. It provides a unique insight into the state of digital transformation in the country. We see this as comprising organisations that are in three distinct groups: Innocence The findings reveal a high degree of innocence in respect of what is driving the need for digital transformation. There is a sense that the seismic changes and volatility we are experiencing today are really nothing more than business as usual, just a bit faster. There seems to be little realisation that the power is shifting away from the employer to the talent. New business models such as collaborative consumption are generating value out of data. New startups are wielding economies of scale, crowdsourcing and utility services to mix it successfully with the incumbents. Refining one’s existing business processes is not a sufficient or appropriate response. If established organisations are going to make the transition, both business and IT leaders need to fully understand how the world is changing, and how they can capitalise on the changing world. Inertia Invariably organisations that have enjoyed success because one set of circumstances gave them a competitive advantage, or even a monopoly, are not necessarily designed to reinvent themselves on a regular basis. Today, at best, most organisations can hope for transient dominance. This means that the focus of business in many instances is establishing where the next cashflow stream lies. The report flags a number of tensions that are serving to fuel this inertia. Digital illiteracy in the leadership, no real sense that survival is at stake and gut-based decision making come to mind. There is definitely a sense that leaders feel the need to change, but that burning platforms are perceived as a problem for other sectors. A big focus on budgets is indicative of a failing business model. When businesses come to a close their margins tend to gravitate to zero. A way to prop up the business is to focus on driving out costs to re-engineer the margin. A focus on cost savings rather than innovation is an indicator that the game is coming to an end. That said, digital economy players are ruthlessly cost sensitive. But they are also ruthlessly curious and innovative. They are quick to establish what the market wants, and are quick to modify or kill off a service or other initiative where required. This real-time dynamic simply serves to make the industrial era players sloth-like in their behaviour. Innovation The survey findings show encourging signs of innovation. However, the indicators are that organisations are not necessarily in a hurry to upskill and empower their people, so that innovation is woven into the fabric of the organisation. There is an emerging school of thought that it may sometimes be better to acquire creative businesses and run them in parallel to the existing business model. However, the survey suggests a relative lack of appetite for acquisitions or joint ventures around digital. The bottom line is that the current focus on process refinement needs to be replaced with a strong emphasis on innovation. 45

41. When asked about potential barriers to successful transformation, the leading causes are all indicative of an industrial era model – slow decision making, risk aversion, legacy investments and poor IT agility. So it is no surprise they are ranked highly. This response suggests these issues are seen as getting in the way of digital transformation, as opposed to being the very things digital transformation needs to address. Interestingly, the relatively low culture change response suggests that the workforce is generally not seen as obstructing the transformation. However, a lack of management sponsorship is a fatal condition, and may be indicative of a digitally illiterate leadership team. The percentage of respondents citing this as a barrier seems surprisingly low, given the leadership findings covered earlier. % of respondents (private sector only) What are the potential barriers to successful digital transformation? Slow decision-making / excess caution Unable to attract talent None of these or Don’t know Too much focus on pure technology Other Services Financial Services Manufacturing Retail Lack of agility in IT Investments in legacy systems Unwilling/unable to change culture Unwilling/unable to rethink business models Privacy/security considerations Knowing which digital trends to respond to Lack of management sponsorship 33% 28% 32% 33% 39% 35% 29% 26% 38% 29% 24% 21% 19% 26% 21% 18% 14% 13% 17% 15% 15% 15% 15% 21% 4% 15% 18% 14% 23% 16% 14% 10% 13% 12% 8% 8% 8% 11% 5% 8% 11% 15% 23% 27% 37

54. Top drivers 65% expect their sector to be significantly disrupted over the next 2 year s 46% think their current business model has less than 5 years left to run Customer experience Lack of IT agility Better customer experience Optimise operations Legacy systems Creating more agile IT Survival Slow decision making Changing culture Top potential barriers Top action taken now Digital transformation in the organisation Industry disruption 68% 39% 58% 61% 38% 50% 51% 33% 43% Financial Services industry profile (224 UK business leaders) 50

56. Top drivers 54% expect their sector to be significantly disrupted over the next 2 year s 39% think their current business model has less than 5 years left to run Customer experience Lack of IT agility Better customer experience Optimise operations Legacy systems Creating more agile IT Survival Slow decision making Changing culture Top potential barriers Top action taken now Digital transformation in the organisation Industry disruption 67% 35% 48% 56% 29% 43% 52% 28% 32% Retail industry profile (115 UK business and IT leaders) 52

60. Top drivers 31% expect their sector to be significantly disrupted over the next 2 year s 42% think their current business model has less than 5 years left to run Lack of IT agility Better customer experience Optimise operations Legacy systems Creating more agile IT Survival Slow decision making Improving employee collaboration Top potential barriers Top action taken now Digital transformation in the organisation Industry disruption 58% 33% 33% 43% 26% 29% 42% 21% 28% Manufacturing industry profile (90 UK business and IT leaders) Customer experience 56

58. Top drivers 48% expect their sector to be significantly disrupted over the next 2 year s 42% think their current business model has less than 5 years left to run Customer experience Lack of IT agility Better customer experience Optimise operations Legacy systems Creating more agile IT Transform products/ services Slow decision making Changing culture Top potential barriers Top action taken now Digital transformation in the organisation Industry disruption 58% 32% 40% 57% 29% 34% 39% 24% 28% Other Services industry profile (250 UK business and IT leaders) includes consulting/advisory, transport/logistics, hospitality, arts/entertainment 54

47. The transition to the fourth industrial revolution is not just an issue for commercial, public and non-profit sector organisations. Technology- enabled workers are also technology-enabled citizens. Augmented citizens will have augmented expectations from their governments. We asked respondents what impact they think digital transformation will have on UK society over the next few years. Security and privacy are widely considered to be a concern. This response seems perfectly natural given the extent to which technology has permeated our lives, and the extent to which our personal and professional data is on record, so to speak. Major security breaches across both public and private sector in recent years add weight to these concerns. A significant number of respondents believe that digital transformation will make for a more efficient society. However, around a third think that older generations of workers will get left behind in some ways, rising to over 40% from those in retail. The feeling from some that employees will resist digital transformation is broadly in line with the observation noted earlier that culture change is a potential barrier. All of these findings suggest a need for government and organisations to do a better job of addressing privacy concerns within society, demonstrating how data is used and empowering citizens to take ownership of their data. It is important that in these endeavours, organisations are mindful of all groups that society is comprised of, ensuring that none get left behind. % of respondents What impact will digital transformation have on UK society over the next few years? Will raise more concerns about privacy/security Will mainly be a force for evil Manufacturing Other Services Financial Services Public Sector Retail Will be a driver of efficiency Will mean older generations will get left behind Will mainly be a force for good Will generate resistance from employees Will enlarge government Will shrink government Very little - just a latest fad, soon surpassed 48% 47% 46% 51% 56% 39% 29% 24% 22% 43% 41% 30% 30% 17% 32% 32% 26% 54% 39% 42% 30% 19% 34% 34% 22% 8% 5% 5% 5% 8% 8% 14% 7% 7% 8% 8% 2% 2% 2% 6% 4% 6% 6% 1% 1% 43

39. Up until now the report has focused mainly on perceptions and opinions around digital transformation. This next section takes a look at the tangible actions in place and subsequent progress being made. Overall, respondents from financial services report more actions taking place than those in other sectors. The big push on customer experience, especially in financial services and retail, is very much in keeping with sentiments earlier in the report. However digital transformation is much more than creating a digital façade. The notion of IT agility is not new. That it has been around for over two decades could suggest a challenging environment that IT leaders have had to operate within. Many financial services organisations will have a challenging balancing act in respect of embracing an agile approach to IT, and meeting the governance needs of the regulators. It is interesting to see people-related initiatives ranking relatively highly, though still in only a minority of organisations. Acquisition and joint venture activity is cited by around one in six of those in financial services and the other services sectors. The number of organisations across all sectors embarking on this activity seems low. Acquiring new businesses can be a smart way to acquire new business models, and new kinds of experience and skillsets. % of respondents What actions is the organisation taking now to address or exploit digital? Creating better customer experiences Acquisitions or joint ventures around digital Don’t know None of these Other Services Financial Services Public Sector Manufacturing Retail Creating more agile IT Changing organisational culture Improving employee collaboration Creating a team to experiment with new technologies Creating radically different products or services Appointing senior digital executives 58% 48% 40% 28% 30% 50% 43% 34% 36% 43% 32% 28% 28% 24% 33% 25% 25% 33% 23% 29% 38% 26% 20% 20% 14% 22% 18% 18% 13% 30% 19% 17% 26% 16% 11% 16% 8% 16% 11% 6% 2% 6% 9% 10% 14% 12% 20% 20% 20% 29% 35

15. It’s clear the threat of disruptors entering the market and taking significant market share is felt most keenly in financial services (33%). That said, the percentage is still relatively low considering the extent of the threats coming from innovations such as blockchain and the fintech community. Whilst previously financial services organisations may have acquired disruptors to counter threats, this is not always possible today. Fintech players know the value of what they are sitting on, so major financial services companies are having to treat single figure headcount startups as peers. While the majority of respondents from other sectors see organisations within their own industries as being the biggest disruptive threats, it’s interesting to note that only a very small proportion consider themselves to be a disrupter. Given the previous finding that a large proportion of organisation’s business models will cease to exist in 5 years, this suggests an acceptance of their own fate. % of respondents What re the main drivers behind digital transformation initiatives? Improve customer/ stakeholder experience Exploit new game-changing technologies Prevent disrupts taking market share First mover advantage Empower employees 24% 24% 10% 20% 14% 14% 17% 16% 17% Other Services Financial Services Public Sector Manufacturing Retail Optimise operations (efficiency) Survive as a business/organisation Transform products/services Develop new revenue streams 24% 23% 21% 21% Not asked Not asked Not asked 68% 67% 57% 43% 51% 61% 61% 56% 58% 58% 51% 52% 38% 42% 32% 50% 34% 39% 36% 44% 42% 37% 36% 29% 31% 39% 24% 26% 29% In the survey, we asked respondents what the main drivers are for digital transformation initiatives within their organisations. Broadly speaking, choices focussed on customers and operations scoring the highest echoes the findings we have seen so far. What’s striking is that survival as a business is seen as a key driver across the majority of industries, showing just how important digital transformation is perceived to be to the future success of organisations. 11

5. Introduction Welcome to Digital Transformation: The Age of Innocence, Inertia or Innovation? The pervasive access to new digital services is changing every aspect of business — shaping growth, disrupting industry landscapes, and providing the catalyst for new business models, products, services and experiences. It is enabling businesses to reimagine their structures and become digital businesses. As such, we have conducted the most extensive study to date into the impact of digital transformation on UK organisations at a time of great uncertainty in the British economy. To this end, we sought the views of more than 1,000 business and IT leaders from large UK organisations across a variety of sectors. This was complemented by a series of in-depth interviews with digital transformation leaders and influencers, allowing for deeper insight. Whilst leaders from a wide range of industries were surveyed, throughout the report we highlight specific findings from financial services, retail, manufacturing, public sector organisations and other services sectors for the purpose of cross-industry comparisons. However, the findings are relevant to readers from all sectors. Further details on the methodology can be found in Appendix B. Digital transformation can mean many things to many people. Seeing it as simply the industrial era, only faster and more efficient, is to miss what is actually happening. In increasingly uncertain times it can be all too easy to not take time to reflect on the seismic implications this change might have on any organisation. This report is a time-effective and valuable means to get you prepared. In an age where uncertainty has replaced business-as-usual and competitive advantage is fleeting, a fundamentally new approach is required. So digital transformation is not simply an IT department initiative or reinventing services for a mobile world. If done right, it permeates the very fabric of an organisation. Everybody is in the digital transformation team and the quality of the leadership is paramount. Yet our survey findings suggest that many organisations are still in an age of innocence when it comes to digital transformation, whilst others seem bound by inertia. However, there are encouraging signs that some have grasped the nettle and are truly driving transformational strategies that will equip their organisations for success in the fourth industrial revolution. A few key findings of note from the pages that follow are: 1. Disruption is real – nearly half of all business leaders (44%) think their existing business models will cease to exist within the next five years. 2. It’s happening quickly – half of all organisations think that their industry will be disrupted within the next two years. 3. Taking action is the only option – yet almost half (46%) of business decision makers think their senior leadership are unwilling to disrupt their existing businesses in order to grow and compete more in the future. 4. The business drivers are significant, yet respondents don’t necessarily understand the full value digital transformation can deliver to their organisations. The top three drivers were cited as: • An improved customer experience • Optimised operations • Survival as a business This last response – survival as a business – is a big statement and shows just how important digital transformation is perceived to the future success of organisations. However, as we will learn, despite digital transformation being regarded as an important step in the evolution of organisations in the years to come, many respondents are still to grasp the true value that pursuing such a strategy can deliver across their entire organisations and beyond. This report provides a benchmark on which to measure the progress your organisation is making, identify some of the obstacles ahead and provide you with recommendations for ensuring digital transformation success. 1

4. Introduction Page 1 Digital Transformation Perceptions Page 2 The Case for Digital Transformation Page 8 Strategic Approach Page 14 Leadership Page 20 Technology Page 26 People Page 30 Progress Page 34 Society Page 42 Conclusion Page 44 Appendix A – Industry summaries Page 48 Appendix B – Methodology Page 60 Contents

55. 66% have a clear or formal digital transformation strategy in place 59% think they have a digitally literate senior leadership team 61% have one or more senior digital leader roles in place 57% think their leadership is willing to disrupt existing businesses Digital leadership 41% are introducing technologies to improve employee collaboration and productivity 33% are facilitating more innovation and experimentation 33% are hiring more people with digital skills and expertise 24% are empowering employees and moving to less centralised decision making Organisational culture Technology Most significant technology trends for the sector (next 3 years) 1. Analytics and Big Data 2. Cloud Computing 3. AI and Machine Learning 4. Internet of Things (IoT) Top technologies actively using or experimenting with 1. Analytics and Big Data 2. Cloud Computing 3. AI and Machine Learning 4. Smart digital assistants (bots) 51

57. 48% have a clear or formal digital transformation strategy in place 38% think they have a digitally literate senior leadership team 45% have one or more senior digital leader roles in place Digital leadership 28% are introducing technologies to improve employee collaboration and productivity 19% are facilitating more innovation and experimentation 21% are hiring more people with digital skills and expertise 18% are empowering employees and moving to less centralised decision making Organisational culture Technology Most significant technology trends for the sector (next 3 years) 1. Analytics and Big Data 2. Cloud Computing 3. Internet of Things (IoT) 4. Sensors and M2M communications Top technologies actively using or experimenting with 1. Analytics and Big Data 2. Cloud Computing 3. Internet of Things (IoT) 4. Sensors and M2M communications 55% think their leadership is willing to disrupt existing businesses 53

59. 42% have a clear or formal digital transformation strategy in place 44% think they have a digitally literate senior leadership team 42% have one or more senior digital leader roles in place 47% think their leadership is willing to disrupt existing businesses Digital leadership 42% are introducing technologies to improve employee collaboration and productivity 22% are facilitating more innovation and experimentation 22% are hiring more people with digital skills and expertise 14% are empowering employees and moving to less centralised decision making Organisational culture Technology Most significant technology trends for the sector (next 3 years) 1. Cloud Computing 2. Analytics and Big Data 3. Internet of Things (IoT) 4. Sensors and M2M Communications Top technologies actively using or experimenting with 1. Cloud Computing 2. Analytics and Big Data 3. Internet of Things (IoT) 4. Virtual/augmented reality (VR/AR) 55

61. 41% have a clear or formal digital transformation strategy in place 41% think they have a digitally literate senior leadership team 36% have one or more senior digital leader roles in place 54% think their leadership is willing to disrupt existing businesses Digital leadership 38% are introducing technologies to improve employee collaboration and productivity 22% are facilitating more innovation and experimentation 19% are hiring more people with digital skills and expertise 11% are empowering employees and moving to less centralised decision making Organisational culture Technology Most significant technology trends for the sector (next 3 years) 1. Analytics and Big Data 2. Sensors and M2M communications 3. Cloud Computing 4. Robots Top technologies actively using or experimenting with 1. Robots 2. Cloud Computing 3. Sensors and M2M communications 4. 3D printing 57

63. 41% expect their sector to be significantly disrupted over the next 2 year s Industry disruption 36% have a clear or formal digital transformation strategy in place 34% think they have a digitally literate senior leadership team 38% have one or more senior digital leader roles in place Digital leadership 33% are introducing technologies to improve employee collaboration and productivity 22% are facilitating more innovation and experimentation 21% are hiring more people with digital skills and expertise 10% are empowering employees and moving to less centralised decision making Organisational culture Technology Most significant technology trends for the sector (next 3 years) 1. Analytics and Big Data 2. Cloud Computing 3. Sensors and M2M communications 4. AI and Machine Learning Top technologies actively using or experimenting with 1. Cloud Computing 2. Analytics and Big Data 3. 3D printing 4. Sensors and M2M communications 59

8. Looking more in-depth at sector-specific findings, public sector and manufacturing respondents place greater emphasis on technology, where an ongoing need to drive down costs and do more with less is the primary objective. It is encouraging to see that digital transformation is not generally perceived to be an IT project. Though, as we will see later, business leaders do not equally share the IT leaders’ perspective that it is central to digital leadership. The relatively low association of digital transformation with overhauling business and operating models, suggests a disconnect between the disruption happening in markets and its potential impact on respondents. Disruptors are redefining sectors. Collaborative consumption as a business model has become mainstream. Yet with the need to rethink existing business models ranking so low, every company should be asking itself what would happen if an Uber or an AirBnB chose to enter their market. Perception of digital transformation, by sector Customer-facing technology initiatives 55% 60% 35% 27% 31% Synonymous with IT/IT dept 15% 20% 16% 8% 9% None of these or Don’t know 22% 20% 19% 22% 8% Employee empowerment/ collaboration 11% 14% 9% 10% 9% Other Services Financial Services Public Sector Manufacturing Retail Technology enablers across the organisation 40% 27% 32% 34% 39% Technology innovation/ experimentation 17% 12% 22% 18% 15% General overhaul of the business model 21% 16% 16% 9% 9% Data, analytics and IoT initiatives 18% 14% 13% 17% 16% 4

11. OPPORTUNITY FUTURE CHANGE CENTRIC BUZZWORD EFFECTIVE MULTI ANALYSIS CONCERN CLOUD WAY FAST BIG CORE VITAL NEW CHALLENGE ASPIRATION ROBOTS SAVING DYNAMIC MARKETS ESSENTIAL IMPORTANT PROGRESS PRIORITY COMPLEX NETWORKING CYNICISM EMERGING URGENT DULL NECESSARY EMPOWERMENT EXPERIENCE AGILE COMPETITION DISRUPTOR DISRUPTION DESPAIR EFFORT STRATEGY POSITIVE INNOVATION COSTLY COMMUNICATE EFFICIENTLY CHANGING ENTHUSIASM THREAT GOOD SLOW DELAY APPS FORCE COST EASE TIMES COOL CHANNEL EFFICIENCY SURVIVE SMARTER ENABLER PROBLEM CUTTING-EDGE CRITICAL CONSTANT GROWTH EXCITING GAME UPDATING ENGAGEMENT DIFFICULT CONNECTING WORKFLOW CAUTIOUS CAUTIOUS D ATA CUSTOMER AUTOMATION ONLINE COLLABORATION COMPLACENCY CLOUD JOB DIGITAL BEHIND ANNOYING SCEPTICAL CREATIVE EMBRACE EMBRACE FEAR EDGE TECHNOLOGY FORWARD LOSS RAPID Words that come to mind around digital transformation 7

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