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Reinventing high tech with a digital core
5-MINUTE READ
October 22, 2024
In the fast-paced tech landscape, continuous innovation is essential to stay ahead. High tech companies need a reinvention strategy anchored by a strong digital core to fuel growth and streamline operations.
In this blog, I'll discuss why investing in a digital core is vital for high tech companies. Our study, Reinventing with a Digital Core, shows that a robust digital core is essential for staying competitive. Industry leaders agree that technology is crucial for reinvention and the rise of AI makes a digital core even more important for enhancing human-machine interaction.
62%
of high tech companies have adopted an enterprise-wide strategy to reinvent most functions and business units
70%
of high tech companies plan to accelerate their innovation spending growth from 2023 onward
89%
of high tech companies plan to use generative AI in IT to fundamentally reinvent their operations
75%
of high tech companies invested around 25% in remediating technical debt between 2020–2022
What is the digital core?
Just as a strong physical core is vital for overall health, a solid digital core is fundamental for the success of high tech companies.
Yet, the journey to a strong digital core varies for each company. High tech companies face challenges like outdated legacy systems and complex landscapes from mergers and acquisitions. These old systems create "technical debt" that hinders scalability and agility, making it tough to integrate new technologies or manage data effectively.
In conversations with industry leaders, it's clear that overcoming these legacy challenges is a top priority. There's a consensus that strengthening the digital core is a key strategy for future-proofing businesses.
Investing in a robust digital core allows companies to overcome these legacy challenges, adapt to new technologies, and unify disparate systems. This strategic move improves data management, enhances analytics, streamlines operations and reduces technical debt, leading to significant industry growth and better market responsiveness.
Powering the potential of generative AI
Reinvention in the high tech sector is increasingly driven by next-generation technologies like generative AI, which strengthens the digital core and supports continuous innovation. A proactive approach to embracing change has led 62% of these companies to implement an enterprise-wide strategy for reinventing most functions and business units, fostering a culture of innovation that keeps them competitive in a dynamic digital landscape.
Research shows that companies with leading digital cores—those in the top 25th percentile—are leveraging generative AI to transform functions and double their value creation. A significant 89% of high tech organizations, surpassing the global average, are incorporating generative AI in IT to fundamentally change their operations. 84% anticipate that generative AI will affect up to 30% of their customer service, automating routine tasks and freeing up human talent for more strategic and creative roles.
While companies will need to invest in tech debt remediation in order to rapidly scale generative AI capabilities, we will see organizations continuing to embrace generative AI to maintain evergreen IT.
Three tenets to achieve reinvention-readiness
As you can see, developing a strong digital core unlocks significant potential for high tech companies and achieving it may be easier than you think. Our research has identified three tenets that companies must follow to achieve reinvention readiness with the digital core:
01
Build an industry-leading digital core tailored specifically to your industry and company
Our Digital Core Index measures a company' digital strength across 7 areas. Enhancing one aspect of the digital core improved others, increasing overall capabilities.
The first step is to elevate your Digital Core Maturity (DCM) to the top 25th percentile. This move alone can result in a substantial performance boost. Companies that achieve this level of maturity see a 1.56X increase in revenues and a 1.37X increase in profitability. Currently, only 15% of high tech companies are achieving a high DCM, yet nearly 60% have the highest concentration at mid-DCM, suggesting that these companies understand the importance and there is opportunity for continued success.
02
Boost investments in innovation, including re-engineering systems for machine (AI) operations
Developing a strong digital core involves reallocating IT budgets towards strategic innovations such as advanced AI. This often means reducing costs by streamlining vendors, optimizing cloud expenses and automating processes. The savings can then support business process redesigns, new product launches and market expansions.
In fact, we found that shifting at least 6% yearly from maintenance to innovation was a recipe for success. To that end, 70% of high tech companies are accelerating their innovation spending growth in 2023 and beyond. Thanks to generative AI, the average innovation spend change expected for the next year is 1.6X greater than the average spend in 2020-2022, accounting for a growth from 5% to 8%.
03
Balance technical debt liabilities with investments for the future
Our analysis reveals that leading companies allocate, on average, 15% of the IT budget toward tech debt remediation. It’s the sweet spot that enables “paying down debt” without sacrificing strategic investments. High tech companies know that technical debt can hinder their digital transformation efforts, making it harder to adapt to changing business needs, leading to insufficient solutions that reduce overall performance. That's why they're proactively managing technical debt as 3 in 4 high tech companies invested around 25% in remediating technical debt between 2020 and 2022 on average.
High tech companies will need to be mindful of their approach to generative AI because our research revealed that AI has risen to become a leading contributor of tech debt, tied with applications. By keeping technical debt in check, they ensure their tech estate is up-to-date and ready to support their ambitious digital initiatives.
According to our research, doing all three creates a 60:40 effect: 60% higher revenue growth rate and 40% higher profitability. By evolving to a reinvention-ready Digital Core using new design principles, high tech companies can also continuously leverage new technologies such as generative AI to drive innovation.
Get started on your own journey
Building a strong Digital Core is not just a technology upgrade. It is a strategic imperative for companies that want to succeed in the age of constant change. By focusing on these key tenets, companies can achieve higher levels of Digital Core maturity, drive innovation and unlock significant economic value. The journey to a Digital Core that uses generative AI is hard but very rewarding. It gives companies the flexibility and agility they need to stay ahead in a competitive world.