Digital transformation and the middle market

The middle market is focused on digital transformation. Over three-quarters (77%) of all survey respondents said they plan to increase their information technology (IT) budgets in 2024. A similar percentage (74%) said digital transformation was the most important area or among the most important areas of investment for their companies.

Creating a digital strategy is essential for businesses, says Rhys Morgan, an RSM US LLP management consulting partner, digital transformation.

“At its core, digital transformation isn’t new,” Morgan says. “It is a combination of traditional information technology with an end-user or consumer impact. Digital transformation’s ultimate goal is to make it easier for a company to do business.”

Organizations may have multiple reasons for embracing digital transformation. However, one-quarter (25%) of all respondents said the main reason for investing more in digital transformation and IT is to drive business productivity, making this the top motivation for companies. 

Improving productivity through digital transformation can take the form of enhanced automation or streamlined procedures. In addition, companies that embrace digital transformation often improve the quality and accessibility of their data, leading to more productive innovations and decisions.

Furthermore, digital transformation can foster increased communication and collaboration among team members, regardless of physical location, enhancing productivity. Regarding this crucial point, companies are interested in the human side of digital transformation: 22% of respondents said improving the customer experience was an important reason for investing in digital transformation. By comparison, 19% said enabling employees to be as connected and engaged as possible was primary.

David Hickethier, principal of RSM’s human-centered design practice, says these goals are interrelated.

“Digital transformation’s impact on the employee experience drives a successful customer experience,” Hickethier says. “Organizations often start with features, functionality and upgrading, and then they tell employees, ‘Hey, we've got new technology, so learn to use it.’ But it’s better to start by understanding the challenges and opportunities from an employee perspective because this will ultimately improve the customer experience.” 

Over half (52%) of all respondents have a clear and agreed-upon digital strategy that addresses their IT and digital transformation goals. But while one-third (33%) of all respondents have plenty of digital activities underway, they have not formalized their approach into a digital strategy.

Matt Kenney, RSM principal and business applications service line leader, says that company leaders may want to focus on the advantages that digital transformation can provide.

“The more an organization transfers a broad set of business data into a single application, the more useful that data becomes,” says Kenney, who notes that enterprise resource planning (ERP) and customer relationship management (CRM) upgrades come up frequently because a single system can link data to other data, making it more useful and helping businesses gain efficiencies.

Tackling a project as complex and ongoing as digital transformation requires company leaders to identify issues, forecast future conditions and commit to an ever-evolving journey. Some leaders may have difficulty fulfilling all those demands. Almost one-quarter (23%) of all respondents said insufficient executive team support is a challenge when it comes to achieving their company’s digital transformation goals.

Eleven percent of all respondents said they have no formalized digital strategy at all. Of these companies, over one-third (37%) say they lack the budget to create and deliver an effective digital strategy. A slightly smaller percentage (32%) say they are unsure how to create a digital strategy that is right for their organization.

Angela Kramer, a senior financial services analyst for RSM, says that companies can avoid a lot of wasted effort if they take time to develop a framework for their digital transformation journey.

“First, understand where you want to incorporate digital transformation and why,” Kramer says. “Then incorporate a solid team. Get people who really understand the big picture and how it is going to play out. It’s not about jumping into the deep end. It’s more important to have a planned, thought-out process.”

Of course, no discussion of digital transformation is complete without addressing artificial intelligence. In particular, generative AI, such as ChatGPT, has been a hot topic over the past year—not just within the realm of business, but in broader society.

AI offers many promising features for the middle market, ranging from data analysis to financial forecasting and more. These features can enhance efficiency, streamline processes and improve decision-making.

The middle market is exploring the use of AI amid this rapidly changing technology environment. At the time of our survey in April, fewer than half of executives polled (44%) said they or someone they worked with had personal experience using ChatGPT or a similar generative AI platform. Broader company adoption was similar: Just 28% said their business was currently using AI and machine learning, and another 20% said they were planning on using it within the next year. Since that time, it would appear the adoption of this new technology has quickly risen, with numerous polls, news releases and public company earnings transcripts citing the ubiquity of AI.

“Artificial intelligence is an exciting topic and a highly contagious narrative,” Kramer says. “Critically thinking through all the implications, AI has the potential to be more transformative to businesses than the industrial revolution.”

Many experts agree that artificial intelligence could have a tremendous impact on businesses. Countless AI-driven applications have flooded the market. Goldman Sachs estimates that global AI investment could total $200 billion within two years.

But as with all new technologies, potential hurdles exist, including legal gray areas about the use of AI-generated content. Tauseef Ghazi, RSM national leader of security and privacy, says companies need to pay attention to AI. “AI has the ability to automate many manual processes and improve efficiency,” Ghazi says.

But are companies losing valuable time waiting for AI applications to take off?

“The runway for these types of transformative technologies is typically much longer than many anticipate and can be obscured by the hype around the ‘next big thing’,” says RSM Deputy Chief Economist Kevin Depew.

He adds that two issues facing many small and mid-sized firms are low knowledge diffusion and low absorptive capacity.

“It will take time to create the internal conditions at the firm level for successful adoption and implementation of generative AI tools,” Depew says. “Because this technology has the potential to dramatically move the needle in terms of productivity and margins, the first-mover advantage is probably overstated. This is a long-term and far-reaching transformation.”

Hickethier, the human-centered design expert, notes that successful companies will use AI to create transparency between employees and customers, allowing interactions to be streamlined and more productive.

“We’re going to see a lot more AI used with cloud-based call centers, knowledge-based systems and business intelligence tools,” he says. “These will have a massive impact on an employee’s ability to more rapidly and powerfully engage a customer, using deep knowledge about that customer to make a connection.”

For many companies, digital transformation doesn’t mean upgrading platforms, utilizing new technology or even addressing long-standing issues. Many organizations are simply focused on securing their assets and strengthening their IT infrastructure. Establishing or maintaining effective cybersecurity is a powerful reason companies invest in digital transformation.

Cybersecurity dominates the landscape of digital transformation. There is a good reason for this: hackers constantly attack companies of all sizes and threaten to destroy their financial foundations and reputations.

An overwhelming 88% of all respondents said they currently employ cybersecurity or data security in their businesses or plan to do so within the next 12 months, making it the most popular choice in the survey. Increased concern over cybersecurity was the top motivation respondents gave (65%) for changing their IT budgets.

The 2023 RSM Middle Market Business Index Cybersecurity Special Report surveyed over 400 senior executives of middle market companies. Twenty percent of respondents said their company experienced a data breach within the last year, and more than two-thirds (68%) anticipate that unauthorized users will attempt to access their data or systems in 2023.

High-profile hacks of American companies have made corporate leaders nervous over their vulnerabilities, and as a result, organizations are fortifying their digital infrastructure rather than investing in new technologies. In essence, protecting what they have is fueling companies’ technology spending.

But this comes at a cost. Almost one-third (32%) of all respondents in the Q2 MMBI survey said cybersecurity concerns present a main challenge to achieving their digital transformation goals.

Ghazi says times have changed, and companies sometimes struggle to keep up.

“Previously, nobody could cart out file rooms worth of data,” he says. “But now that information is digitized, and if you don't have the appropriate cyber protections around it, your data can be compromised or taken out of your network very, very quickly.”