Causation or correlation - The link between approaches to digital transformation and business success

Techaisle’s 2021 US SMB and Midmarket Digital transformation adoption trends research covering businesses from 1 to 4999 employees (collectively named mainstream businesses by Techaisle) shows a correlation between digital transformation and business growth. Unlike many IT market terms, which tie to specific technologies, digital transformation is most often used to indicate an amorphous state. A state in which firms can seamlessly deploy new digital capabilities that streamline current or next-step processes, eliminating the friction inherent in basing these capabilities on manual tasks and physical documents/inputs. SMBs and midmarket firms view digital transformation as a proxy for business process efficiency. For many years, it has been a management goal, embedded, usually without a consistent set of steps and defined outcomes, in the IT plans of a substantial majority of small businesses (1-99 employees) and more than 90% of midmarket (100-4999 employees) firms. The pandemic brought urgency to these plans. The speed reflected the management’s understanding that highly automated processes are essential in a business environment where physical interactions are awkward or forbidden, adding necessity to efficiency as compelling reasons to invest in digital transformation.

Digital transformation segments

To refine the current and planned digital transformation adoption status perspective, Techaisle segmented the market to one of four phrases to characterize organizations’ attitude or approach towards digitalization of existing processes –

• Holistic: Digitalization is an essential aspect of overall business strategy
• Inclusive: Digitalization is a meaningful but non-essential aspect of overall business strategy
• Siloed: Digitalization strategies are underway in some departments, but there is no overall digitalization strategy for the business
• In the shadows: Digitalization may be occurring in areas of the company, but it is neither a departmental nor overall business strategy
• Nonexistent: Business has no digitalization activity or plan; firms have yet to begin digital transformation adoption.

Small business adoption of digital transformation is still at a primary stage. In 27% of small businesses (1-99), digital transformation is either “nonexistent, “in the shadows,” or “siloed.” However, this is vastly lower from 51% in 2020, indicating that small businesses drastically improved their approach to transformation within the last year. Midmarket firms, which have higher overall digital transformation adoption rates, are also much more advanced in their approaches. 90% of midmarket firms take either an “inclusive” or “holistic” approach to digital transformation today. Data shows that there has been an increase of 34% within midmarket firms (100-999) and a corresponding increase of 26% within upper midmarket firms (1000-4999) in their approach to holistic digital transformation from siloed or inclusive approaches.

Digital transformation and business growth

To explore the impact of digital transformation, Techaisle compared the stages to different business and technology measures. The most intriguing result came from evaluating revenue trends with the approach to digital transformation. Across small businesses, high-growth organizations are at least twice as likely to report a holistic approach to digital transformation than their low-growth/no-growth peers and 2-3 times less likely to have an in the shadows approach or no digital transformation activities at all. Small businesses with a holistic/inclusive approach are experiencing a 6.6% revenue growth compared to only 2.5% within the siloed/in-the-shadows segments.

Within the midmarket (100-999), approaches may be similar, but the growth experienced by the holistic segment is higher, 6.5%, as compared to 3.6%. Even in the upper mid-market firms (1000-4999), the growth rate is 7.4%, higher than the firms with siloed/in-the-shadows approaches.

It is an open question as to whether this relationship is causal or simply a correlation that applies to progressive mainstream businesses. Techaisle believes that at this point, it is more likely to show a correlation than a cause-and-effect connection between digital transformation and growth. Looking forward, though, it is at least possible that the nature of this relationship will change. Organizations that take practical, holistic approaches to digital transformation will be poised to grow faster than peers that are still tied to manual inputs and tasks, lacking the capacity to quickly and flexibly automate processes within their operations. Given the relatively low rate of advanced approaches to digital transformation within the small business, this is a ‘digital divide’ that may have significant negative consequences for small firms that do not commit to moving beyond business as usual approaches to delivery/execution.

IT supplier call to action

Firmographics do not define the categories of holistic, inclusive, siloed, and in-the-shadows: it is essential to spend time with customers to understand where they are on their digital transformation journey and to tailor marketing strategies accordingly. There is undoubtedly a correlation between small business adoption of specific technologies (such as VDI/DaaS and SD WAN) and advanced approaches to digital transformation at a platform level. The findings from the survey of foundational and second-order technology adoption patterns to support digital transformation offer a tremendous range of add-on/upsell opportunities for businesses targeting the leading edge of the small business market. Small businesses that invest in these applications/capabilities have self-identified as firms that will push the envelope on IT investment and deployment. Aligning product roadmaps and partnering and marketing strategies to develop consistent engagement with these firms will help you to build a competitive advantage in an important segment.

Overall, the market for digital transformation in the midmarket is far greater than in the small business segment, so priority #1 is ensuring that your organization builds a defensible midmarket position.

Suppliers focused on core infrastructure should find substantial opportunities to upgrade and expand systems to create the framework for digital transformation. Those that sell advanced solutions that run atop these foundational systems will encounter high levels of interest. The trick in both cases will be to move past call-and-response to a position of helping clients to roadmap their paths into digital transformation, identifying benefits, capabilities, and the investments needed to deliver on the business promise of the digital future.