Why budgeting must change to accommodate digital transformation

In fear of being Amazoned

Seventy-eight percent of the CEOs polled in a recent KPMG CEO Outlook survey said, “they need to be quicker to shift investment to digital opportunities and divest businesses that face digital obsolescence. In his book, “the Fourth Industrial Revolution”, Klaus Schwab - founder and executive chairman of the World Economic Forum – reinforced this sentiment by characterizing digital technologies like Big Data, Cloud Computing and AI as operational disruptors stating, "the question for all industries and companies, without exception is no longer am I going to be disrupted, but rather when is disruption coming, what form will it take and how will it affect me and my organization".

Technology shifts like this wreak-havoc on incumbent organizations placing them squarely in the crosshairs of being "Amazoned" because they:

1. Typically don’t recognize their existing 1.0 business model is approaching/has approached end-of-life
2. Are incapable of transforming into a 2.0 business model once they do.

Automation is not transformation

Unfortunately, many of these organizations interpret this challenge in the context of automating existing processes rather addressing the transformational need. Most continue to use their traditional budgeting process – using a retrospective look into their existing 1.0 business model through the lens of the org-chart. The output of this exercise results in the CEO's direct reports identify projects that optimize their functional departments, submitting them through the Capital Committee (more often the CIO) to sort out and knit together a cohesive digital operating model – a recipe for stagnation and obsolescence.

Turning the ship away from obsolescence

In the midst of the Fourth Industrial Revolution, we believe CEOs, CFOs and CIOs have to facilitate a forward-looking, prescriptive design and budgeting process viewed through the operating model, where the organization is viewed as a system of processes or capabilities.

Looking through the operating model, organization can identify end-to-end processes that need to be enhanced to meet the 2.0 requirement as well as identify those processes that should be actively retired, repurposed or retrained. Utilizing this budgeting process ensures the current business model does not crowd out the transformation need and in doing so addresses the CEO's quest to "be quicker to shift investment to digital opportunities a divest businesses that face digital obsolescence. "