Four fundamentals for realizing maximum potential and business value from technology investments
● Despite economic challenges, global digital transformation spending is set to soar by 2026, emphasizing its resilience-building role and response to workforce issues.
● Manufacturers aim to enhance digital maturity by 2030, with 91% planning higher tech spending, including a 20% focus on AI.
● Extracting tech value remains tough, with limited focus on business cases. Max ROI needs strategy, proof, execution, and staff engagement.
Despite continuing economic concerns, the pace of digital transformation is not slowing. By one projection, global spending on digital transformation is projected to reach $3.4 trillion by 2026 — representing a 57% increase from 2023. Transformation is key to building agility and maintaining growth amid challenges such as a shrinking labor force.
Most manufacturers view themselves in the middle in terms of digital maturity. But by 2030, they expect digital operations to deliver tangible benefits in the form of speed and flexibility, customer satisfaction, and financial returns.
To support their digital aspirations, manufacturers expect to increase technology investment relative to current levels. In research for the Manufacturing in 2030 Project, 91% of organizations said they expect to increase spending on technology — 29% expect increases to be “significant.” Moreover, 20% expect investments in artificial intelligence (AI) to increase by at least 50%.
Expectations for return on investments are high. But in the Manufacturing Leadership Council’s 2023 Digital Leadership Survey, one finding stood out: There is relatively little focus on the value derived from technology. Only 16% said their executive management team wants to know the business case for and payback from digital transformation, and only 14% said management wants to know which digital use cases will drive the most value for the investment.
If manufacturers are to get maximum value from their technology investments — including forays into AI and other emerging digital capabilities — they must be laser-focused on value and their approach to delivering it.
Why manufacturers have struggled to derive value from technology
It is hard to fault those who are struggling to maintain the trajectory of digital transformation amid a procession of major — if not generational — macroeconomic challenges. These issues of the moment are critical and have commanded attention. That said, short-term focus often creates a fragmented approach to longer-term strategy. And present cost-containment imperatives run the risk of derailing critical projects — particularly those in early stages that have not yet produced a return on investment. When the markets rebound and attention shifts from cost to growth, manufacturers that have paused or cut critical projects will be behind.
Continuously evolving technology trends can also cause transformation to stray from “the plan.” There is perhaps no better example of this than the recent surge in interest around generative AI and its potential to assist with challenges such as worker shortages and the need to do more with less. The fact is, this technology does not necessarily have immediate impact potential for all manufacturers, but many have probably shifted resources away from critical initiatives to explore it.
“When the markets rebound and attention shifts from cost to growth, manufacturers that have paused or cut critical projects will be behind”
Risk aversion is another big factor — most notably, cyber concerns that have impeded the full convergence of information technology and operational technology (IT/OT) necessary to create insights for the digital factory. Additionally, IT/OT integration requires effective collaboration with the IT function, which historically has focused on managing spend and securing data. This doesn’t always create a return on investment, and in some cases works against it.
Finally, many manufacturers have struggled to scale up new technology initiatives. The World Economic Forum’s Global Lighthouse Network recently looked at this issue. More than two-thirds (70%) of manufacturing companies worldwide are currently stuck in pilot mode when it comes to digital transformation projects. It is hard to maximize value from technology when it is only used on a small scale.
How to maximize the potential and business value of technology
Value does not come through technology alone. It is the product of the organization’s approach to investing in it and capabilities for deploying it. Here are four fundamentals that are at the center of maximizing potential and return on investment.
1. Determine the projects that are foundational enablers – and do not let them get derailed by short-term thinking
There is a tendency to look at every project as a discrete investment and try to prove the return. When it comes to evolving technologies in manufacturing, there are many interrelationships. Some technology investments are “nice-to-haves” when you look at them alone, but they are “need-to-haves” when it comes to the bigger picture. It may be hard to calculate a direct return on investment because their real value comes through their enablement of other capabilities.
A good example is master data management. A project to clean up and restructure data does not necessarily produce a return on investment. Alone, it looks like just another cost. But it is a necessary step for building analytics that will help your organization identify problems, increase reporting accuracy/timeliness, or even enable advanced strategies such as data monetization. It is beneficial to couple projects or investments in a way that makes it easier to understand the impact and justify the investment.
This is why technology transformation requires long-term vision and the ability to move toward it with pace. Having a macro, multi-year picture that shows how discrete projects connect, and which ones are vital to building the foundation that enables long-term value creation.
“Some technology investments are ‘nice-to-haves’ when you look at them alone, but they are ‘need-to-haves’ when it comes to the bigger picture”
This long-term perspective is particularly critical in the current economic environment – with the temptation to cut budgets or delay spending in the interest of cost containment. When it comes to these foundational enablers, be thoughtful in asking and answering the question: If we cut or delay investments now, what happens to processes and plans down the road? Many times, we have seen scenarios where it costs more to fix things later, or to accelerate stalled capabilities. Furthermore, short-term thinking in order to balance cost, timeline, and ROI today may exclude future options and inadvertently paint the organization into a corner later.
2. Identify the right investment opportunities — and use data to build conviction in their materiality by demonstrating the ROI
Beyond the foundational enablers, technology decisions and investments should always be grounded in business strategy and the imperatives that are driving the need for change and new technology — whether that is reducing cost, making more product, increasing sales, improving response time, or eliminating defects.
Evaluating and prioritizing opportunities should involve a value identification exercise that:
- Identifies current issues and diagnoses the causes
- Explores how technology can solve issues and create new value
- Establishes a baseline that allows you to measure future impact and value creation
- Defines your method for measuring impact on the P&L statement; anyone can pick metrics, but metrics don’t always measure return on investment
Many manufacturers struggle with the ROI part — specifically, demonstrating technology’s projected ROI to secure approval for investment. For one thing, it is not uncommon for the value or return from new technology to lag. Consider the generative AI example: Maximizing value from this capability requires time to build up the skills, the tools, and the capabilities for the payoff to really materialize.
Demonstrating ROI also requires being able to bridge the gap between the art of the possible and the realities of today. Data is key. You must be able to analyze data to translate potential into quantifiable operational and financial outcomes. Ideally, this analysis should use your own operational data rather than simply market benchmarks, which lack consistency in calculation and do not account for unique aspects of your business.
“If you are piloting a digital solution on one line or in a lighthouse facility, design it in a way that makes it simple to deploy to the rest of your operation and start planning for expansion to other lines or facilities”
This is a critical step, and there is a tendency to try to address it internally. For many, it is a matter of cost. Keep in mind that this is new territory for many in manufacturing, so consider carefully whether you can do it effectively on your own or consider external expertise. Some questions to ask include: How mature are our data and analytics capabilities? Do we have the bandwidth or expertise internally? How quickly can we get it done versus having an external resource?
3. Bridge the gap between strategy and execution
Even if a company can effectively identify value potential, delivering it is another matter. The 2023 Digital Leadership survey revealed measured anxiety about organizational vulnerability due to current levels of preparedness. More than one-half of respondents (59%) consider their organization to be moderately vulnerable. One statistic was telling: 33% believe their executive management team is not at all prepared to lead and manage digital transformation. This was up from 10% in the 2022 survey.
Improving execution requires several factors:
- An effective management system and structure to guide progress
- Clear execution plans with clear definitions of responsibility
- Tracking to capture progress, assess value, and inform timely adjustments based on what is and is not working
In particular, an effective management system facilitates execution by integrating people across functions, establishing proper controls within processes, and providing structure and oversight for developing the right capabilities. This system also plays a critical role in fostering positive behaviors such as a bias for action, sense of accountability, willingness to challenge the status quo, reliance on data, and others.
For manufacturers, one big execution opportunity is improving the ability to scale successful pilots. There are many ways to do so. If you are piloting a digital solution on one line or in a lighthouse facility to see how it works and assess return, design it in a way that makes it simple to deploy to the rest of your operation and start planning for expansion to other lines or facilities. In addition, look for additional applications for technologies in which you have invested, such as your IIoT or cloud platform, FactoryTalk, AWS SiteWise, or others. Since digital operations produce data and data enables insight, look at the insight you are deriving from implementing digital technologies and ask, “What else could we learn with additional analysis?” Always be looking to learn and grow.
4. Bring your people along
A big element in bridging the strategy-execution gap is people. This deserves its own point. Wherever you are on your digital journey, do not underestimate the need to bring people along.
Giving people digital tools and systems enables them to look at information and make good, timely decisions. But you must engage leaders, employees, and teams in the process — rather than just handing off new technology — so they understand how and why to use it. Without that knowledge, they will not own or embrace technology, and you will miss out on additional innovations that they can bring as users of the technology. That is how value is created and grows.
“You must engage leaders, employees, and teams in the process — rather than just handing off new technology — so they understand how and why to use it”
Dedicated attention to this not only creates enterprise value, but also career potential and longevity for employees and aids in addressing one of manufacturing’s biggest challenges: retention.
This is a big opportunity many companies are missing. The digital journey must have a change management strategy and plan. Yet 60% of manufacturers do not have a change management strategy to support their digital strategy.
An adequate training/learning approach is also critical. Manufacturers cannot fall back on traditional “blanket” training formats. Instead, look to techniques that really imbed knowledge and understanding such as personalized coaching plans or instructions and help screens built into the tools for reference when employees need it most.
The real value comes with the right approach to deployment
Value realization is about more than the technology itself. In fact, the four fundamentals described above really have little to do with technological features and functions at all. Establishing them requires effort, and some of it is hard — and often unfamiliar — work for manufacturers. But do these well, and you will see exponential growth in the business value and potential from your technology investments. M
About the Authors:
Randal Kenworthy is Senior Partner, Consumer and Industrial Products, West Monroe
Kris Slozak is a Director, Consumer & Industrial Products, West Monroe