The Peri ls of the Digi tal DivideDecember 7, 2017

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MIT CISR gratefully acknowledges the support and contributions of its Research Patrons and SponsorsPATRONSAlixPartners LLPAvanadeHuawei Technologies Co., Ltd.ISACALTIMicrosoft CorporationPricewaterhouseCoopersAdvisory Services LLC

SPONSORSAetna, Inc.Akamai TechnologiesAllstate Insurance CompanyANZ Banking Group Ltd.Australia PostAustralian Securities & Investments Commission (ASIC)Australian Taxation OfficeAustralianSuperB2W Companhia DigitalBanco do Brasil S.A.Bank of QueenslandBarclaysBBVA Bemis Company, Inc.Biogen, Inc.BMW GroupBNP ParibasBNY MellonThe Boston Consulting Group, Inc.BT Group plcCanadian Imperial Bank of CommerceCardinal Health, Inc.Caterpillar, Inc.CEMEX

Chevron CorporationCHRISTUS HealthCochlear LimitedCommonwealth Bank of AustraliaCPPIBCSBSDBS Bank Ltd.DentaQuestEl Corte InglésEquifaxExxonMobil Global Services CompanyFairfax MediaFerrovial Corporacion, S.A.Fidelity InvestmentsFrieslandCampinaGeneral ElectricGenworth FinancialGlaxoSmithKlineHanover Insurance GroupHitachi, Ltd.Howden Joinery Group plcInsurance Australia GroupIron MountainJohnson & Johnson (J&J)LKK Health Products Group Ltd.LPL FinancialMarathon Oil CorporationMarkel CorporationMcGraw-Hill EducationNational Australia Bank Ltd.National Disability Insurance SchemeNew Zealand Government—GCIO OfficeNielsenNomura Holdings, Inc.Nomura Research Institute, Ltd.

Nordea BankNorthwestern MutualOCP S.A.Orange S.A.Org. for Economic Co-operation and Development (OECD)Origin EnergyOwens CorningPepsiCo Inc.Pioneer Natural Resources USA Inc.Principal Financial GroupProcter & GambleQBE Raytheon CompanyReserve Bank of AustraliaRoyal Bank of CanadaScentre GroupSchindler Digital Business AGSchneider Electric Industries SASStandard Bank GroupState Street Corp.Suncorp GroupSwinburne University of TechnologySydney WaterTD Bank, N.A.Teck Resources LimitedTenet HealthTetra PakTrinity HealthUSAAWestpac Banking CorporationWestRockWorld Bank

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Source: MIT CISR 2015 CIO Digital Disruption Survey (N=413 and 2016 interviews) and 2016 company interviews. Customer Experience=effectiveness on customer knowledge+omnichannelcapability+customer experience projects+customer experience performance. Operational Efficiency=effectiveness on automation and employee productivity projects+% of core capabilities with APIs+cost of operations performance. Quadrants are splits at 2/3 along each axis.

What is digital business transformation?

TransformedTraditional

Operational efficiencyImproving operating margin

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Trad

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Future ready• Both innovative and low cost• Great customer experience• Modular and agile• Data is a strategic asset• Ecosystems ready

Integrated experience• Customer gets an (simulated)

integrated experience despite complex operations

• Strong design and UX• Rich mobile experience including

purchasing products

Industrialized• Plug and play products/services • Service enabled ‘crown jewels’ • One best way to do each key task• Single source of truth

Silos and spaghetti• Product driven • Complex landscape of processes,

systems and data• Perform via heroics

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Retail banking is a good transformation example

Business is changing

‘Born digital’ companies have emerged

Competitive threat to traditional companies

Traditional companies must digitally transform

...and create digital platforms

We call this ‘Silos and Spaghetti’

Traditional banking model

Digital banking model

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Digitally stood-up businesses in established industries

How do traditional companies compete with digitally born companies given demographic changes and often times lower pricing?

Online platform Key product Industry disrupted

Apple iOS mobile platform PC operating systems

Google Ad-supported search Ad-supported media

Facebook Ad-supported network Ad-supported print media

Amazon Amazon Marketplace Malls and department stores

Uber Ride-sharing app Taxi and limousine companies

Airbnb Home or room daily rentals Hotels and booking sites

Snapchat Messaging app Traditional communications

Expedia Online bookings Travel agents

Turbo Tax Tax return preparation Tax accountants

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Source: MIT CISR 2015 CIO Digital Disruption Survey (N=413) and 2016 company interviews.. Net Margin is relative to industry average

Future-ready firms have the best margins compared to competitors

TransformedTraditional

Operational efficiencyImproving operating margin

Cu

stom

er e

xper

ien

ceIn

crea

sing

NPS

Tran

sfor

med

Trad

itio

nal

Future readyIntegrated experience

IndustrializedSilos and spaghetti

15%

Percentage firms Percentage points above or below industry average net margin

| -3.6 23% | 16.0

51% | -5.1 11% | 4.6

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Source: MIT CISR 2015 CIO Digital Disruption Survey (N=413 and 2016 interviews) and 2016 company interviews. Customer Experience=effectiveness on customer knowledge+omnichannelcapability+customer experience projects+customer experience performance. Operational Efficiency=effectiveness on automation and employee productivity projects+% of core capabilities with APIs+cost of operations performance. Quadrants are splits at 2/3 along each axis.

What is digital business transformation?

TransformedTraditional

Operational efficiencyImproving operating margin

Cu

stom

er e

xper

ien

ceIn

crea

sing

NPS

Tran

sfor

med

Trad

itio

nal

Future ready• Both innovative and low cost• Great customer experience• Modular and agile• Data is a strategic asset• Ecosystems ready

Integrated experience• Customer gets an (simulated)

integrated experience despite complex operations

• Strong design and UX• Rich mobile experience including

purchasing products

Industrialized• Plug and play products/services • Service enabled ‘crown jewels’ • One best way to do each key task• Single source of truth

Silos and spaghetti• Product driven • Complex landscape of processes,

systems and data• Perform via heroics

2 4

3

1

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Choose a pathway

Where are you today? What is the digital disruption threat level?

1. Path 1 if your customer experience is ok and threat is not high.

2. Can’t wait to improve your customer experience or new scary competitors. Path 2.

3. Can’t wait to improve customer experience but a few initiatives will make a big difference (e.g., a great app). Start with those and then focus on operations and repeat in small steps. Path 3.

4. High threat and can’t see a way to change the culture, customer experience and operations fast enough. Path 4.

Choose your pathway to future ready

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B2B companies are more future ready than B2C companies

Silos and spaghetti

Integrated experience Industrialized Future ready

Manufacturing 40% 12% 12% 36%

Heavy industry 38% 23% 5% 35%

IT, telecom,and media 41% 19% 16% 24%

Educationand healthcare 70% 6% 8% 16%

Retail 68% 18% 0% 14%

Financial services 65% 11% 13% 11%

Services 63% 20% 9% 8%

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Digital financial mindsets are also key

Manage IT spend like an investment portfolio• Labor• Hardware• Software• Outsourcing• Consulting

Antiquated IT department Transformed IT department

Costs to run business

Improve businessDuplicative efforts

Keeping the lights on

CrisisCosts to run

business

Invest to Improve business

Enabling business value

Routine operationsand maintenance

Run Improve ProtectIT spend necessary to perform ordinary course business processing

Investing in technology that enables better business performance

Managing cybersecurity, disasters, andsystem performance

MINIMIZE SPEND MAXIMIZE ROI INVEST ENOUGH BUT NOT TOO MUCH

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Succeeding at digital requires more infrastructure

Prior to MIT CISR’s 2015 survey, IT investment was total IT spending in the enterprise—operating expenses plus capital depreciation—including all IT, technology, services, data, outsourcing, and people dedicated to IT. For the purposes of MIT CISR’s 2015 survey, we expanded the definition of IT infrastructure to include all digital infrastructure; digital investment was total digital spending in the enterprise—operating expenses plus capital depreciation—including all IT, technology, services, digitized information, outsourcing, and people dedicated to IT.

1993 to 1997 2001 2007 2012

IT in

vest

men

tD

igit

al

inve

stm

ent 2015

Applications Infrastructure

57%

43%

54%

46%

41%

59%

47%

53%

37%

63%

Source: MIT CISR Surveys

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Succeeding at digital requires more infrastructure (cont’d)More investment in digital infrastructure is correlated with desirable outcomes that include more revenues from innovation and higher margins Measure

Top-performing companies

Bottom-performing companies

Percentage of ITinvestment spent on infrastructure

55% 37%

Percentage of core capabilities that are service enabledvia APIs forinternal use

51% 27%

Percentage of IP-addressable assets 48% 30%

Figure 2: Top performers spend more on infrastructure and connectivity

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Digitalization is taking the world by storm –transforming numerous functions…Re-imagining…payments Re-imagining…contracts

Re-imagining…customer service

Re-imagining…meeting people

Re-imagining…money Re-imagining…photography

Re-imagining…navigation Re-imagining…news Re-imagining…education

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A high level view across industries

Source: PWC (retail survey)

Media Retail Consumer products

• File sharing (Napster) brought newconsumer demands

• Social/mobile made content easy to get

• The main disruptor has been the consumer itself

• a secular shift inconsumer preferences

• Demand for CP companies’ products has fragmented

• Consumers fickle and empowered by internet

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A high level view across industries (cont’d)

Banking Automotive Manufacturing

• Digital orientation of consumers israpidly evolving

• And is a big factor in decisions to switch banks

• Connected• Autonomous• Shared• Electrified

• Networked plants• Real-time transparency into

supply chains• Maintenance and asset tracking costs

slashed with IoT methods• Mass customization production

Internet of Things (IoT)and Connectivity

Factory of the Future - Automation, wearables, mixed reality, 3D printing

Connected business and enterprise architecture

Digital automation

Collaboration and social networks

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Digital business is driving two distinct transformations

Source: Ross, Beath, Sebastian, “Digital≠Digitized,” MIT CISR research briefing, Oct. 2017

Digital = rapid business innovation

The transformation involves: Empowering people to experiment, release, and constantly enhance digital offerings

Digitized = operational excellence

The transformation involves: Instilling discipline around core transaction and back office processes