A disruptive force across all sectors of the economy, Walter Price discusses the impact of digitisation on investors.
Amid the drama of 2018’s technology markets, one sector showed notable resilience: enterprise software. This was no accident, these companies are geared into a major shift in the way the corporate sector manages its technology needs.
This “digital transformation” is dramatically changing industries from the healthcare to consumer sectors and beyond. In 2018, more companies woke up to the potential gains from a digital strategy.
What is digital transformation?
At its heart, it involves rethinking existing business models and processes through the use of technology. As such, it may incorporate many aspects of technology, including artificial intelligence, the internet of things, cloud computing and software-as-a-service.
Why did digitisation fast-track in 2018?
Adoption of digital transformation strategies accelerated in 2018. Until relatively recently, mid-sized companies had been eager adopters of cloud computing, but larger companies – possibly because of greater implementation challenges – had been more reluctant.
However, these companies increasingly recognised that it was a major competitive disadvantage to lag on digital transformation.
At the same time, companies had more cash to direct to transformation programmes as a result of the US administration’s tax cuts.
Cloud computing continues to get cheaper and its functionality is improving, notably with new artificial intelligence options.
LogicMonitor’s recent study, Cloud Vision 2020: The Future of the Cloud, found that 50% of IT professionals believe that artificial intelligence and machine learning are playing a role in cloud computing adoption today, growing to 67% by 2020. It also showed that digitally transforming enterprises (63%) are the leading factor driving moves to cloud computing today.
Increasingly, enterprises cannot overlook the efficiency gains from a move to the cloud, particularly when compared with upgrading legacy hardware and software.
Upgrading legacy systems may achieve a 10% to 15% productivity improvement, compared with 50% for switching to a new architecture.
In many cases, companies are transitioning from decades-old software and the new software that they are adopting will be embedded in their technology infrastructure for decades to come. For investors, this means that the return from these companies is less cyclical and more like a long-term annuity.
Entering the mainstream
Companies of all stripes are discussing technology investment and the opportunities available.
In healthcare, for example, electronic health records, digital imaging and e-prescription services have been integrated into existing IT systems for large healthcare organisations across the globe.
There is also the increasing use of “telemedicine” – apps providing immediate consultations for minor health complaints, important for rural areas with poor access to medical facilities.
At the consumer healthcare end, we are seeing the adoption of wearable health monitoring devices, which increasingly feed into health insurance assessments.
There are a number of different types of companies benefiting from this trend. There are the large cloud providers, where pricing benefits from economies of scale, such as Amazon, Google and Microsoft.
At the same time, there are the smaller software-as-a-service providers. This includes names such as ServiceNow, whose offering includes enterprise platform-as-a-service management software for human resources, law, facilities management, finance, marketing, and field operations.
One of the companies in our portfolio, Veeva Systems, has built cloud-based systems for the life sciences industry. They take on the administration process for drug approvals for healthcare companies. This means that companies can focus on finding and making drugs, while Veeva takes control of areas such as regulatory filing or drugs safety.
The life sciences industry is happy because it saves them money, but it also helps collective knowledge because it builds a co-ordinated database.
A solution to the productivity puzzle
Part of the reason companies need to embrace digitisation is for productivity enhancements.
According to a recent McKinsey report, Solving the Productivity Puzzle: the Role of Demand and the Promise of Digitisation, around 60% of productivity growth is likely to come from digitisation.
In our view, the digital transformation has a considerable way to run, which should continue to support those cloud computing and software-as-a-service companies that benefit from it.
Walter Price is senior portfolio manager at Allianz Technology Trust.