How To Improve Digital Density

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1 Digital Density Index Guiding digital transformation A new way for Australian government and business leaders to understand, measure and manage digital strategies to drive growth and competitiveness

2 The Accenture Digital Density Index empirically shows increased penetration of digital technologies in economic activity can significantly lift Australia s productivity and GDP growth potentially driving annual GDP growth rates by 0.25 percent over the next five years, resulting in an estimated AUS$34.5 billion of additional economic output (GDP) in the year Digital Density Index

3 The key is for governments and businesses to understand what drives digital density, measure it, and then manage it. Digital Density Index 3

4 Introduction It is no secret that greater use of digital technologies can help the Australian economy become more competitive and grow more strongly. But new research from Accenture Strategy provides empirical evidence they can, and quantifies the impact of increased use of digital technologies on competitiveness and economic growth (see About the research for more details). At the core of our research is the Accenture Digital Density Index, a comprehensive scorecard of what truly matters to digitally-led economic productivity. Reflecting the pervasive nature of digital technology, the index covers more than 50 indicators across four equally weighted areas of economic activity: Making Markets, Running Enterprises, Sourcing Inputs and Fostering Enablers (Figure 1). A higher score on the Digital Density Index reflects a broader and deeper adoption of digital technologies, as well as the skills, ways of working, and regulatory frameworks needed to realise their economic potential (Figure 2). Australia s score 52.7 out of 100 places the country eighth out of the 17 leading economies we studied, considerably below the 75 earned by top-ranked Netherlands. This position reflects both the progress Australia has made in embracing digital as well as the work that the country still has before it. For instance, although Australia has high internet usage (87 percent of households use the internet) and leads the world in telecommunications investment per head, it scores poorly on creating and exploiting digital markets which is reflected in the fact that only 2.3 percent of retail sales in Australia are conducted online, compared with 10 percent in the UK and 13 percent in South Korea. Furthermore, the country s enterprises are inconsistent in their application of digital technologies to drive efficiencies. Australia is a leader in cloud and analytics use, but lags in the use of radio-frequency identification (RFID), knowledge management and crowdsourcing. And while Australia is second only to the Netherlands in the use of digital to source finance, it has the lowest score among advanced economies in the use of digital to source and manage labour. 4 Digital Density Index

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6 Figure 1: Areas of economic activity measured by the Digital Density Index Making Markets Sourcing Inputs This is the recognition that existing markets are becoming increasingly digital, and new markets are being created through digital means. This is the extent to which the factors of production are sourced and used with digital technology. The second part of sourcing inputs is to capture the degree to which digital technologies change the lifecycle of sourcing these factors for the business. Running Enterprises Fostering Enablers Running enterprises relates to the extent to which firms are embracing digital technologies and activities to carry out business functions such as supply chain, strategy, talent, procurement, and research and development. The impact of digital is in part enabled by the institutional and socio-economic environment. 6 Digital Density Index

7 Figure 2: Digital Density scores for 17 leading economies (0-100) Netherlands US Sweden South Korea UK Finland Austria Australia Germany China Spain Belgium Japan Brazil France Italy India Making Markets Sourcing Inputs Running Enterprises Fostering Enablers Another potential shortcoming is an insufficient focus on building the digital skills that are vital to economic growth. New research has found that eight in 10 Australian parents think that digital skills and computer programming should be integrated into primary and secondary curricula. With youth unemployment and underemployment at high levels it is not surprising that Australian parents are concerned about the future employment opportunities of their school aged children, commented Suzanne Campbell, CEO of AIIA. 2 Closing these and other gaps in digital adoption could lead to greater productivity and, other things being equal, faster GDP growth. According to our analysis, an increase of 10 points in Australia s Digital Density Index score could boost the country s annual GDP growth rates by 0.25 percent over the next five years, resulting in an estimated AUS$34.5 billion of additional economic output (GDP) in the year 2020 (measured in 2014 prices). 3 This compares with more than the entire education budget of $29.5 billion. 4 Importantly, our model found it can take up to six years for the full economic benefit of greater digital density to be felt, with productivity benefits feeding through fully into trend growth rates of GDP over this period. This insight should be a catalyst for governments and businesses to act now to increase the digital density of economies and organisations. Digital Density Index 7

8 Beyond the technical model creating a new mindset The Digital Density Index can help gauge the current digital density of an economy and guide digital investments in a business. In fact, a digital density profile can be an important starting point for leaders as they shape and implement digital strategies, and target specific opportunities for improvement. But perhaps even more important, the broad areas of economic activity the model describes can also help Australian government and business leaders think differently about how digital technology can transform the country s economy and its businesses to capitalise on new growth opportunities. 8 Digital Density Index

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10 Making Markets Understand and support new business models and markets In the business sector, innovative thinking is demonstrated by energy retailer Powershop. Serving over 50,000 B2C and B2B customers in New Zealand and Australia, Powershop offers a completely new way for customers to buy energy. Powershop sells energy as a consumer goods product, not as contracts with complex tariffs. Using either a state-of-the-art website or mobile app, customers can buy different energy products, before or after they use them, by adding units of energy to their cart and checking out via the online register just as they do on Amazon. They can also access a wide range of online tools that show them how they ve consumed energy and help them forecast future usage. 5 Importantly, new business models are being fuelled through an application programming interface (API) economy where companies are mixing and matching capabilities and information from numerous providers to build new services and concepts. For example, Australia finance and accounting software provider MYOB has a well-developed API and developer programme that allows third parties to create add-ons to build new services, such as debtor management and notification. 6 Running Enterprises Transform how you operate An original selling point of digital technologies was their ability to take time, cost and distance out of an activity or process. That still holds true today. Companies and governments should increase their use of digital technologies to transform key business processes to create greater leaps in efficiency and productivity. For example, global mining company Rio Tinto has increased free cash flow in its copper mining operations by leveraging data streams from processing equipment to continually optimise the production performance of the plant Digital Density Index

11 Sourcing Inputs Think forward to the Industrial Internet of Things To keep growing and innovating, economies and businesses must use land, talent, capital, ideas, and other resources ever more effectively. The Industrial Internet of Things would further accelerate the digitalisation of supply chains, as objects interact with objects and humans to optimise processes or create new product and service hybrids. 8 For example, Tasmanian wine producers are already gathering information on leaf wetness, soil moisture, soil temperature, rainfall, relative humidity, solar radiation, wind speed and direction, and (ambient) temperature all with the aim of being able to take action to better manage grapes on the vine. 9 Fostering Enablers Look beyond digital infrastructure High-speed broadband is important. However, digital requires a much broader range of enabling factors beyond technology infrastructure. Governments and businesses must work together in at least four additional areas to create an environment in which digital can flourish. The first is making it easier for entrepreneurs to launch digital businesses as Telstra is doing with its muru-d project. This accelerator provides mentoring, tailored acceleration services, and perhaps most important, investment, to early-stage startups. muru-d participants receive AUS$40,000 in seed capital as well as access for six months to Telstra experts and office space purpose-built for startups. 10 Strong links between academia and industry are also important to accelerating newbusiness launches. But while such structures are prevalent in the US and UK Stamford, Cambridge and Oxford Universities are good examples they re largely absent in Australia. The second is streamlining and simplifying market rules to reflect the degree of commerce, online and offline, that now depends on digital. If Australian organisations are to grow and innovate at pace with their global peers, they must act quickly, stretching their digital boundaries by forging new connections and embracing emerging technologies that enable them to compete in the growing digital ecosystem. Digital Density Index 11

12 The third involves initiatives to develop digital skills, which are increasingly critical to the success of a country s economy and its citizens. A recent report by the Slade Group suggested only nine percent of employers believed recent university graduates were equipped to undertake digital role requirements and increasingly, the private sector is being involved in the re-tooling of the workforce to take advantage of digital opportunities. For example, one leading Communications provider is active in facilitating staff to take part in schemes to exchange staff from the US to improve skills in digital. 11 The fourth is consumer and citizen trust that businesses and governments would use their personal data responsibly. Digital trust relies on secure infrastructure and appropriate data protection rules, as well as initiatives by businesses to become increasingly transparent with their customers as to how and why their data is used. At the heart of this in Australia, is the handling of data, transparency about how customer data is used, the purposes it is used for, the rules for sharing with third parties and the length of time data is stored. Some organisations, such as Telstra, are encouraging trust by taking a transparent approach by explaining what data is held and giving access to the same data related to each customer. This data is also available to law enforcement agencies under a lawful request without a warrant. 12 Considering digital density in business growth and investment decisions As businesses increase their use of digital technologies, they should consider the digital density of the countries and regions in which they operate, and those they target for new investments. The reason is intuitive: A company heavily reliant on digital for growth for example, a bank that wants to drive aggressive adoption of its online banking capabilities should favour countries with greater digital density. In fact, a strong digital business infrastructure across a region s markets, supply chains and talent has become a critical criterion for companies seeking to expand or relocate. It s just as important as access to natural resources, a good transportation system, and skilled people. That s especially true as governments begin to seek to actively boost digital density to increase growth and national competitiveness of economies. And for businesses whose prospects are closely tied to GDP, or are looking to improve their position in their own industry rankings, digital density may be a leading indicator of growth hotspots. 12 Digital Density Index

13 Conclusion Australian companies have advantages and strengths when competing in the global digital economy. However, as our analysis shows, being competitive requires committing to digital in all aspects of economic activity. That means going beyond merely digitising existing processes and customer channels. To truly excel, Australian organisations need to reinvent processes and develop entirely new digitally-enabled products, services and customer experiences. The Digital Density Index can help leaders more accurately determine how and where they should invest to best leverage digital technologies to drive competitiveness and economic growth, as well as measure their progress along the way. Digital Density Index 13

14 Reference 1. The Accenture and Oxford Economics study on Digital Density, AIIA: Australian parents want their kids taught digital technology skills. February 20, Australian-parents-want-their-kids-taughtdigital-technology-skills.htm 3. The Accenture and Oxford Economics study on Digital Density, Australian Government Taxation and Spending content/overview/html/overview_44.htm 5. Powershop questions-answered/ 6. MYOB launches API for online accounting suite itnews for Australian Business March 18, Rio Tinto chief Sam Walsh hails $80 million cash flow boost from big data, Peter Ker, Sydney Morning Herald, March 14, www. smh.com.au/business/rio-tinto-chief-samwalsh- hails-80-million-cash-flowboost-from-big-data pju.html#ixzz3LIOZdTKC 8. Industrial Internet of Things Will Boost Economic Growth, but Greater Government and Business Action Needed to Fulfill its Potential, Finds Accenture article_display.cfm?article_id= On cloud wine how cloud computing can enhance the wine on our table, Chris Griffith, The Australian, November 21, technology/on-cloud-wine-how-cloudcomputing-can-enhance-the-wine-on-our-table/ story-e6frgakx Muru-D website, Australia struggling with a digital skills shortage. April 28, australia-struggling-with-a-digital-skills-shortage/ 12. Telstra Privacy privacy/customer-access About the research The Accenture and Oxford Economics study on Digital Density was based on three principal research components: 1. Collection of internationally comparable observations across hundreds of measures of digital technology and related indicators, from public and private sources. 2. From more than 50 of those indicators, the construction of a statistically tested composite Digital Density Index for 33 major economies, 16 of which included partially imputed scores. 3. Multivariate regression analysis to estimate equations that explain variation in countries total factor productivity by reference to their relative Digital Density Index scores. 14 Digital Density Index

15 The study estimates only the effect of changes in total factor productivity on GDP. Expanding Digital Density likely would have additional positive GDP effects from factors including expansion of the digital/ict sector and capital deepening across the economy. Further analysis could also consider other effects of expanding Digital Density, including effects on labour markets, public finances, and investment patterns. About the Accenture Institute for High Performance The Accenture Institute for High Performance develops and publishes practical insights into critical management issues and global economic trends. Its worldwide team of researchers connects with Accenture s consulting, technology and outsourcing leaders to demonstrate how organisations become and remain high performers through original, rigorous research and analysis. For more information, please visit: About Oxford Economics Oxford Economics is one of the world s foremost independent global advisory firms, providing reports, forecasts and analytical tools on 200 countries, 100 industrial sectors and over 3,000 cities. Headquartered in Oxford, England, with regional centres in London, New York, and Singapore, Oxford Economics has more than 100 economists and analysts one of the largest economics teams in the private sector. For more information, please visit Digital Density Index 15

16 For more information, please contact the authors Dr John Cassidy Managing Director Accenture Digital Strategy Accenture Australia & New Zealand David Mann Managing Director Accenture Strategy Accenture Australia & New Zealand Contributors Alexander Broeking, James Hogarth, Arika Allen, Tara Purcell Stay Connected Follow Us Twitter Connect With Us LinkedIn accenture_australia About Accenture Strategy Accenture Strategy operates at the intersection of business and technology. We bring together our capabilities in business, technology, operations and function strategy to help our clients envision and execute industryspecific strategies that support enterprise wide transformation. Our focus on issues related to digital disruption, competitiveness, global operating models, talent and leadership help drive both efficiencies and growth. For more information, or visit About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become highperformance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, Its home page is Copyright 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture