Trends and Technology
Investing in Value is the New ROI
September 21, 2021 |
To grasp the next decade’s opportunities companies must embrace a value-first philosophy.
It’s hard to find any industry that the COVID-19 pandemic hasn’t disrupted over the last 18 months. The pandemic left many businesses scrambling to adapt, and it has forced organisations of every size and in all sectors to fundamentally reconsider how they operate.
Economic lockdowns, social distancing and remote work have all contributed to a rapid migration to digital technologies. And in the financial technology space, the pandemic has even accelerated the fintech revolution itself. Integrating technology into all aspects of a business’s operations is no longer optional — it’s foundational.
This is a significant shift because the promise of a fintech revolution has been around for more than a decade. However, we’ve only witnessed a cautious adoption of new technology until recently. Change has happened, and it has happened fast. For example, a recent report from global consulting firm McKinsey & Co. found that in 2020, the world advanced five years in technology adoption in only eight short weeks.
Possibly even more significantly, McKinsey & Co. highlights that the recovery of economies and companies hinges on the vital role of digital in today’s businesses.
It’s impossible to ignore that the future is fully digital. Companies that fail to leverage big data and analytics to manage risk, implement Environmental, Social and Governance (ESG) initiatives and even automate ethical and strategic sourcing, will simply fall further and further behind.
To move beyond ‘best practices’ we need a new philosophy
In Australia, corporations have not truly embraced this fundamental trend. On one level, the majority of corporations realise and articulate the impact that technology can have beyond simply driving top-line growth. They cite its ability to significantly improve speed, cost, flexibility, and sustainability across the business and in particular, their supply chains.
But on another level, they’re highly resistant to going “all in” and continue with incremental technology improvements instead of making foundational change.
This approach is what many Australian organisations call “implementing global best practices,” and you can find this language in almost every company’s annual report. These documents extol the virtues and potential of investments made in technology projects. However, few Australian companies treat technology as a true core business process — and the ones that do are hard to identify because they treat technology as unremarkable, seeing it simply as part of the business itself.
The reality in 2021 is that most Australian corporations haven’t fully adapted to this new digital-first world. Instead, they’ve kept the same business model of maximum value extraction, ultimate profit creation and increased shareholder returns underneath a veneer of implementing new technology.
This tactic may have worked pre-pandemic for many organisations, but it won’t work now.
We need to change from ROI to IIV: ‘Investing In Value’
If companies want to create long-term sustainable returns, they need to move from a model that prioritises a short-term Return On Investment (ROI) approach to one of Investing In Value (IIV) over the medium to long-term.
For each business, this process will be different, and there are so many dimensions to it. To make it visible in the context of a value chain, companies must ask these four questions:
- Are suppliers and customers treated as equals?
- Are investments focused on maximising ROI or building long-term value?
- Is there true equality in the value chain?
- How can we support and even co-invest with our value chain partners?
The long-overdue development of ESG in corporate Australia is one of the first formalised programs where this move from ROI to IIV can be witnessed. For example, the movement to incentivise suppliers rather than audit them has prompted a renewed focus among corporations to reevaluate how they contribute to the communities where they operate. They are fundamentally moving from an investment/return mentality to one of co-investment and growth.
But this is just a small beginning because the pandemic has forced a paradigm shift in how businesses operate and, indeed, why they operate. Businesses and their value chains emerging from the pandemic’s many waves of disruption are still experiencing immediate-term problems, but over time this focus will change to assessing what went wrong and how we can avoid it in the future.
For example, I suspect the notion of ‘just in time’ manufacturing, holding minimal stock, and relying on open borders for commerce flows will be significantly adapted. To be truly world-leading, companies need to recognise that a just-in-time approach is no longer tenable in a post-COVID world. Instead, corporations will need to invest in value. Simply stated, it will cost much more to have and then maintain a sovereign manufacturing capability.
This means absorbing ongoing “costs of resilience” like investing in technology, paying suppliers more and diversifying value chain ecosystems to protect against future disruptions.
Purposely choosing value over return and treating technology as an unremarkable part of running the business is a fundamental shift. It goes against the instinct to maximise returns and it cuts across current business performance indicators.
It’s also happened already. The bigger question is, do Australian corporations have the courage to embrace it?
The pandemic exposed the many vulnerabilities of global value chains and has dramatically accelerated the need for a digital-first approach to business. This isn’t the first time a black swan event has impacted the global economy, and it certainly won’t be the last.
It’s time to fully embrace this fintech revolution by investing in your value chain rather than extracting value from it.