Analyst firm Gartner has revealed 10 ways to fund the shift to digital business.
42 percent of CEOs are taking a digital-first approach to business change or taking digital to the core of their enterprise model, according to Gartner’s 2017 CEO survey.
CEOs indicate that the bulk of money comes from self-funding for funding digital programs, rather than existing budgets, as they see the primary purpose of digital initiatives to win revenue rather than to save costs.
“This should give CIOs pause for thought, given conventional IT management works mostly on the basis of using operating budgets,” said Andy Rowsell-Jones, vice president and distinguished analyst at Gartner.
10 ways to fund digital business
Internal self-funding: digital revenue pays
This will only work for short-term projects to gain immediate revenue returns, such as for digital marketing campaigns or price-elevating digital product features. This approach needs clear revenue attribution and is good for continuous, incremental growth, but will not work for disruptive market change.
Within existing budgets
It can work for relatively superficial digital business change over two to three years, if budgets are healthy, already generous and need trimming. It is not good for rapid transformation as it might throttle existing business.
Investment from reserves
Reserves are the part of profit set aside for internal reinvestment to help the business in tough times, which digital disruption and market loss might fit under. If reserves are healthy, it might accelerate digital transformation with low financial impact on current operations.
Increase relevant budgets and cut others
This option requires a very clear understanding of how digital business growth will substitute heritage business slowdown. It is useful if digital business is recognizable and deliverable in the same corporate structure to the same customer base, but not appropriate for adjacency moves or radical industry reinvention.
Increase relevant budgets and cut profits
It may be easier if a disruptive, threatening competitor makes the transformation need more obvious to all, or for private or family-held companies with long-term planning horizons and fewer owners to convince.
New bond or equity capital from investors
If digital transformation requires heavy, multiyear investment, fresh capital may need to be raised. Smaller companies with faster growth rates can raise equity capital from investors by issuing more shares. Larger mature companies with strong reputations can raise debt capital by issuing more corporate bonds.
Borrow capital from lenders
Loan capital is typically shorter term, more tactically arranged and helps bridge gaps arising from digital transformation. It is usually only available for conventionally describable, measured risk situations, rather than for speculative entrepreneurial action or situations of industry reinvention.
Off balance sheet entries
Another option is to place all or part of the new digital product, service or activity in a separate company shell with investors, benefiting “risky” or “unusual” experiments. This is useful for “farming” digital ecosystems and startups by working with VCs and incubators as co-founders, as well as for industry consortiums.
When digital disruption is serious in an industry, one strategy can be to sell legacy business units early to buyers that are happy to run them in their declining years. The capital receipts from divestitures can then be used to help fund the growing new digital business ventures and revenue streams.
Some assets that were useful in the past but have less relevance in digital business may have a market value to others. Cycling out old physical assets to pay for digital growth can work where “dematerialization” is in play.