Apigee Institute Survey Special Report KPIs, Conviction, and Competitive Advantage

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1 Apigee Institute Survey Special Report KPIs, Conviction, and Competitive Advantage On enterprise KPIs including revenue and customer satisfaction, the leaders at deploying apps, operating APIs, and using data analytics dominate past outperformance and expectations for high impact from digital in the future. In this special report we share three ways to build skill using digital to drive performance on enterprise KPIs: embracing market trends with conviction; adopting best practices for decision-making; and following patterns exhibited by strong performers. The measures that matter most to global enterprises are usually variations on the same short list: revenue and margin, customer satisfaction, market share, and innovation. As examples of digital transformation changing the game in every industry grow, conviction that digital capabilities can drive enterprise key performance indicators (KPIs) has become nearly as universal. Two-thirds of executives expect digital business to increase operating income over the next three years, and more than eight in ten CIOs say mobility will significantly improve customer interactions. 1 As we noted in a previous report that 99% of marketing and IT executives in large companies see digital capabilities having an impact on their enterprise s overall results in the next 12 months, and 99% expect the level of impact to continue or increase over the next five years. 2 Those reporting stronger current skill connecting digital investments to enterprise KPIs anticipate more impact and express much greater confidence in their company s competitive trajectory. This report drills down on establishing a framework to better digital investments to enterprise KPIs in order to provide tools for action in our analysis for those who want to build a similar level of confidence and results. KPIs: digital competitors lead on past performance, dominate future impact Segmentation Past Outperformance Future Digital Impact % 6% 81% 7% 7% 19% Digital Competitors We segmented companies on strength deploying apps, operating APIs, and using data analytics into Digital Competitors (top half) and Digital Dabblers (bottom half). [Percentages are % and 7% due to tie scores.] Digital Dabblers Digital Competitors account for nearly 2/ of companies reporting strong outperformance on customer satisfaction, margin, revenue, share, or delivering new products and services in the last 12 months. Among companies expecting a big impact from digital on enterprise KPIs over the next 12 months that will also increase a lot over the next five years, Digital Competitors dominate by more than four-to-one. 1 McKinsey Global Survey Results: Bullish on Digital, McKinsey & Company, August Accenture Mobility CIO Survey 201: Business Opportunities in the Maturing Mobility Market, Accenture, February 201.

2 Situation Analysis Establishing a framework to connect digital investments more directly to enterprise KPIs is one of three building blocks for using data analytics, deploying apps, and operating APIs well along with alignment between marketing and IT and best practices for assessing the ROI of digital investments. Digital Competitors companies in the top half of current skill on digital capabilities are much more confident in their ability to establish this framework well, reporting an average score of 7. (on a 10-point scale where 10 is very strong and 1 is very weak ) on this metric. By contrast, companies in the bottom half (what we call Digital Dabblers ) report an average of only.2. At the same time, KPIs identified as those that technology-enabled capabilities will impact most are similar between Competitors and Dabblers. Financial KPIs lead, cited by three out of four companies overall (7%), followed by market share (71%), and customer satisfaction (68%). Targeted KPIs similar KPI most impacted by digital (top three) Financial Share Satisfaction Efficiency Comparative Employee Digital Competitors 0% 1% 76% 6% 6% 72% 6% 6% 66% 9% 7% 7% 0% 0% 80% Digital Dabblers Despite similarity in the KPIs most affected, Competitors anticipate more impact overall and dominate expectations for maximum impact. More than a third (7%) versus fewer than one-in-ten (9%) Dabblers see a big impact on KPIs in the next 12 months that will also increase a lot over five years. This appears to reflect using digital to better effect rather than general company performance: comparing only high-performers companies reporting strong outperformance versus competitors in the past 12 months widens the gap. The percentage of Dabblers expecting maximum impact remains the same (9%) while among Competitors it rises to nearly half (8%). But Digital Competitors expect much greater impact All companies by digital impact expectations High performers by digital impact expectations Increase a lot Increase somewhat or less 21% % 1% 71% 7% 9% 9% 6% Increase a lot Increase somewhat or less 20% 27% 1% 71% 8% % 9% 6% Moderate impact or less Big impact Moderate impact or less Big impact Digital Competitors Digital Dabblers Apigee Institute Survey Report: An Emerging Digital Divide, Apigee Corporation, May Apigee Institute September 201

3 Methodology We asked IT and Marketing executives to identify the top three areas of enterprise results that technologyenabled capabilities such as big data and analytics, digital marketing, app, or APIs will impact in the next 12 months and five years, respectively, from a list of six. (Respondents could offer fewer than three in both cases.) The full text from the survey and the short labels used in this report are listed below. Label Full Text Efficiency Efficiency goals such as reducing time-to-market or increasing re-use of existing assets Comparative Comparative targets such as competitive parity or matching best in class benchmarks Satisfaction Perception goals such as customer satisfaction or brand reinforcement Financial Financial goals such as increasing revenue or margin Share Share or market penetration goals Employee productivity goals Employee Our analysis of ROI criteria for evaluating digital investments found using certain criteria are associated with confidence in a company s decision-making (for example, the use of real options approaches to financial modeling and ad hoc criteria correlate with more and less confidence, respectively). In contrast, this analysis shows that no single KPI predicts perceived strength connecting digital to enterprise results simply by being cited as one of the top three areas of impact. The implication that no one size fits all KPI will be optimally independent of a company s distinctive strategy is consistent with other research. Peter Weill and Stephanie Woerner at MIT s Sloan School of Management identified four types of CIO, each associated with outperformance on a different metric: for example, leadership on return on capital is associated with a CIO spending more time on cross-company strategy (what they call Embedded activities). Leaders in sales from new products have CIOs that spend more time building relationships with external customers. Implications That no KPI is a magic bullet may be cold comfort, however, to those looking for ways to build the level of confidence exhibited by those who have mastered connecting digital to business results. The odds of executives from high-performing companies feeling very confident that their company will achieve a much stronger competitive position over the next five years triple if they report performance in the top half (6-10) of a point scale on connecting enterprise KPIs to digital. This jumps to five-to-one when scores on choosing effective ROI criteria is included as well. We explored three ways to increase skill and confidence connecting digital to KPIs: Implications of our analysis of ROI best practices; KPIs + ROI = confidence Change in odds of expressing maximum confidence in competitive trajectory Whether broader indicators of organizational alignment contribute to stronger or weaker performance connecting digital to enterprise KPIs; and Patterns for sequencing selected KPIs among leaders. Apigee Institute Special Report: Three ROI Criteria for Digital Success, Apigee Corporation, June 201. P. Weille and S. Woerner, The Future of the CIO in a Digital Economy, MIS Quarterly Executive, June Connecting digital to KPIs scores= Connecting digital to KPIs + Using good ROI criteria scores=6-10 Apigee Institute September 201

4 Conviction matters: Digital Competitors fully embrace trends Digital Competitors embrace key trends as critical to their company s competitive position much more than Dabblers. As we explain in the Recommendation section, the overall extent of to which these four trends are perceived as relevant predicts reported strengths connecting digital to KPIs. Relevance to their company s competitive position over the next five years on a five-point scale, where is extremely relevant and 1 is not at all relevant. The number of connected devicesfrom smartphones to smart cars and even wearable computing devices-is heading for a tipping point at which most work, play, and commerce will have a digital dimension. As a result, software will touch nearly all social interactions or commercial transactions, with the potential to generate data of unprecedented scope. Competitors Dabblers 2% % % 0% 21% 7% 0% 2% 0% 7% 100% Mastering a fast feedback loop will be a key differentiator. Companies that quickly deliver digitally instrumented products or services, harvest data from market interactions, and use insights to rapidly iterate and optimize their value chain will gain competitive advantage that continuously builds on itself. Apps will drive brand, share, and revenue. When one company sets a new industry standard for digital experiences, others must either challenge them for leadership or risk that network effects from reaching a critical mass of users or developers will entrench them in a dominant position. The dynamics that drive winner-takeall results in the technology sector will come into play in many industries. Turning products into platforms that sustain an ecosystem of developers or partners will become a way to seize a dominant market position and a disproportionate share of a sector's profit. Competitors Dabblers Competitors Dabblers Competitors Dabblers 2% % 6% % 1% 2% 0% 2% 0% 7% 100% 1% 6% 1% % 2% 9% 0% 2% 0% 7% 100% 17% % 8% 9% 2% 1% 0% 2% 0% 7% 100% Apigee Institute September 201

5 Recommendations We undertook this special report to identify ways to strengthen marketing and IT leaders ability to establish a framework to connect digital investments more directly to enterprise KPIs. We conclude with three recommendations based on patterns in our data from executives at 200 large companies. 1. Adopt ROI Best Practices In our report Three ROI Criteria to Drive Digital Success we found use of specific ROI criteria to be associated with executives ratings of their company s strength making decisions about digital investments. Using three criteria, together a real options approach to financial evaluation, customer satisfaction, and internal efficiency is associated with higher scores. Conversely, using ad hoc criteria is associated with below-average scores, while using competitive benchmarking is associated with slightly better than average perceived performance. Using ROI best practices predicts stronger reported performance connecting digital to enterprise KPIs as well. Plotting average scores on both metrics for those using selected ROI criteria uncovers an almost one-to-one relationship between beating and falling short of the overall average score on each. This complements our finding that no KPI is itself a magic bullet for success. Rather impact follows ROI best practices matter ROI best practice predicts strength connecting digital to KPIs (Index mean = 1) ROV, Sat, Effic NPV, Sat,Effic Neither Sat nor Effic w/comp from robust decision-making: better decisions about what to invest in and more clarity about how digital investments will move the enterprise forward are related. If so, we would expect that in addition to anticipating more impact, leaders will also show signs of tighter strategic alignment. Score on connecting digital to KPIs w/ad Hoc Score on digital ROI decisionmaking Competitors lead on ROI/KPI alignment ROI criteria increase the odds of focus on related KPI Efficiency Satisfaction Share Financial Competitive C D C D C D C D C D This pattern surfaces in a comparison of the odds that a company frequently using a digital ROI criterion also targets the corresponding KPI as one of those most impacted. The odds are directionally higher for Digital Competitors (C) compared Digital Dabblers (D) (with the exception of Comparative and a tied point estimate for Satisfaction). Moreover, Competitors dominate cases where the odds reach or approach statistical significance (in the chart at left, the bars show 9% confidence intervals and those that do not overlap the baseline are significant at that threshold). Apigee Institute September 201

6 2. Conviction Matters Unsurprisingly, the importance that executives report is assigned to connecting digital investments to enterprise KPIs at their company predicts performance doing so. Motivated by the patterns we saw relating to ROI criteria and strategic Conviction gives Competitors an edge Embracing trends predicts strength connecting digital to enterprise KPIs: relative contribution of each variable alignment, we added performance on choosing ROI criteria that drive better decisions about digital investments to our model and confirmed its strong correlation with performance connecting digital to enterprise KPIs. Importance of connecting digital to enterprise KPIs Performance using ROI criteria that drive better decisions about digital investments Conviction that key trends are relevant to competitive position Based on coefficients from linear regression, adjusted R-squared 0. We have seen what we call polite fictions put the competitive trajectory of enterprises at risk. This can occur at companies that have been aggressive initiating digital projects, but do not transition from experimenting to scaling to the level needed to transform the business. Pilots and discovery are valuable, but we argue only as a means to an end. Leaders must wrestle with questions invoking the full implications trends: If a digital native like Amazon were to enter our industry, how long would it take for us fight back effectively? If a traditional competitor were to go digital such as Michelin s foray into a cloud-based service for fleet management could we counter their launch of a higher margin line of business? We find that incorporating a measure of the degree to which executives embrace four market trends as critical to their company s future into our model shows that conviction drives an edge connecting digital to KPIs. This is intuitive if we take the sum of ratings of the relevance of these trends to their company s competitive position as an indicator of the urgency placed on understanding market trends, assessing opportunities and threats, and making big bets that depart from business as usual (e.g., embracing the shift of consumer attention and computing power from the desktop and the web to the mobile phone and the location-aware app). ROI best practices provide the tools to make decisions that move the enterprise forward: conviction provides the motivation. Why Competitors and Dabblers? We previously explored an emerging digital divide by comparing Top Digital Performers those in the top quartile of reported strength deploying apps, operating APIs and using data analytics with the Weakest (those in the bottom quartile). In this report, we want to frame a call to action respecting the fact that for some, becoming a top performer overnight is unrealistic. At the same time, there is a material difference in trajectory based on whether a company achieves digital performance in the top versus bottom half of the competitive set. 6 Apigee Institute September 201

7 . Learn from Leaders Proceeding from the finding that no individual KPI cited as an area target for digital impact is a magic bullet, we analyzed the distribution of expected impact across time solely among those companies who identified a KPI as one of their top three: either: within the next 12 months; over the next five years; or both within the next 12 months and over the next five years. Almost across the board most frequently a KPI was cited as impacted both within the next 12 months and over the next five years. However, there are three notable departures from this pattern: Next 12 Months Next Years Both Competitors are more likely than Dabblers to focus on efficiency in 12 months versus next years among those citing this KPI as a top area of impact, % of Competitors versus 19% of Dabblers specifically focus on the next 12 months. Competitors are more likely than Dabblers to target financial metrics over the next five years versus the next 12 months among those citing this KPI as a top area of impact, 2% of Competitors versus 17% of Dabblers focus on the next five years. Competitors and Dabblers are united in citing satisfaction most frequently a focus both in the next 12 months and over the next five years (% and %, respectively). We see this reflecting a pattern for winning competitive advantage through digital transformation: An efficiency edge Leaders use digital strategy to build an edge in efficiency including re-using or externalizing existing assets, bringing new products and services faster, and greater velocity attracting external developers or integrating with partners in order to create multi-party experiences. Amazon CEO Jeff Bezos 2002 mandate that all internal interfaces must be designed from the ground up to be externalized is a canonical (and successful) example. 6 Fuels a satisfaction or share gap An edge on efficiency positions leaders to exploit shifts in customer expectations, partnership opportunities, or a competitors misstep or to create their own disruptive attacks with speed and scale that competitors are unable to match. This can drive a sudden, dramatic shift in satisfaction, share, or both. Netflix ability to project its streaming content nearly ubiquitously across devices (over 20 by one report) is an example that has entrenched its dominant share. Which drives a revenue & profit chasm In the IT sector the share and ecosystem leader seizes a disproportionate share of revenue and profit (e.g., Microsoft during the PC era and Apple in the mobile sector today). As digital brings platform dynamics into play in every industry, the same patterns will manifest. Digital native Amazon continues to penetrate deeper into the retail sector. Nike by far the largest sports company in the world by revenue may be a bellwether for how a traditional product company uses digital transformation to turn products into platforms and win a decisive platform advantage. Graphs show conceptual shape of leader versus laggard KPI curves over time assuming start at parity. Conviction that today s trends create opportunities of this magnitude explains why leaders make connecting digital to enterprise KPIs a top priority and expect a big and increasing impact from it. 6See for example the Secret to Amazon s Success Internal APIs, The API Evangelist, January Apigee Institute September 201

8 Next Steps Subscribe To receive the future research report and notification of other Institute publications, go to Join The Apigee Institute invites executives in Global 2000 corporations, academic researchers and domain experts who believe in the business value of mastering the art and science of creating digital ecosystems and are willing to participate in building a body of real-world data as a shared resource. To request an invitation, contact institute@apigee.com. About the Apigee Institute The Apigee Institute delivers strategic insights and practical recommendations based on realworld benchmarks and original research, with a focus on guiding organizations as they build strong digital ecosystems through apps, APIs and data. Learn more at About Apigee Apigee is the leading provider of API technology and services for enterprises and developers. Hundreds of companies including AT&T, Walgreens, Bechtel, ebay, Pearson, and Gilt Groupe as well as tens of thousands of developers use Apigee to simplify the delivery, management and analysis of APIs and apps. Apigee's global headquarters are in Palo Alto, California, and it has offices in Bangalore, London, Austin and Detroit. To learn more, go to This work is licensed under a Creative Commons Attribution-ShareAlike.0 Uported License. 8 Apigee Institute September 201