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Why digital fragmentation poses a direct threat to innovation and growth

IT proportal 2018-03-12 20:30:41

Many companies are now preparing to adapt to a world that will be constrained by national boundaries, as policies and legislation further tighten national control over cross-border flows of products, services, capital, people and data.

We call this digital fragmentation, where the free flow of resources and talent which has powered the digital revolution becomes more restricted and regulated when it crosses national borders. And with that comes the threat of disruption to the global business environment and the potential to inhibit companies’ strategies for growth and innovation.

All this is happening at a time when global businesses (and business models) increasingly rely on the rapid and unobstructed flow of data between people, machines and devices across national borders. Moreover, future innovation and growth plans—including the Internet of Things and artificial intelligence—are fundamentally reliant on such data flows.

The number of restrictive measures adopted by G20 members since the global financial crisis almost quadrupled, from 324 in 2010 to 1,263 in 2016. This includes tighter controls over the flows of IT talent, products and services.

This friction between business plans and the fragmented global regulatory context is real and is forcing many businesses to review their plans for international expansion.

A recent global Accenture survey of 400 CIOs and CTOs found that nearly three-quarters of them believe their companies will exit a market, delay market-entry plans or abandon such plans altogether over the next three years because of increased barriers to globalisation. The figure for UK respondents was even higher, at 84 per cent.

Most of these business leaders said that these barriers will compromise their ability to use or provide cloud-based services or data and analytics services across national markets, and to operate effectively across different national IT standards. Even more alarming: 86 per cent believe their IT strategies and systems are vulnerable to this trend towards greater fragmentation.

The research suggests that UK businesses are more alert than their global peers to the risks that this fragmentation presents to digital growth. It also suggests that they are at the vanguard of taking action in response. For example, 62 per cent are already in the process of reorganising their global IT architectures and governance structures to address new barriers to globalisation, compared with 51 per cent of global respondents.

This friction is only set to grow: on the one hand, global business is becoming more digital, furthering our dependence on data flows. At the same time, we can expect more rules and legislation to safeguard our rights and security in the rapidly evolving digital world. That’s why it’s critical for there to be constructive dialogue between the technology innovators and the lawmakers, so that those who understand the trends are involved in crafting the legislation ― ensuring that when such rules are implemented, they stimulate, rather than impinge upon, growth and innovation.

Case in point: two-thirds of the business leaders we surveyed said that they are already investing in automation to offset labour restrictions — presumably (and ironically) an opposite consequence to that intended by the policymakers who crafted those restrictions on labour movement.

Key actions

The truth is that business and government find themselves with shared objectives in confronting this friction, yet there is insufficient dialogue today between stakeholders to achieve progress.

Digital fragmentation is forcing companies to make fundamental structural changes in key strategic and operational plans across a broad range of activities. These include not only global IT architectures, physical IT location strategy and cybersecurity, but also the recruitment of IT talent, as well as other global business processes that rely on the free flow of data. Ultimately, this trend compromises companies’ ability to generate growth and innovation since sales, marketing and R&D functions are vulnerable to constraints on the free flow of data.

With such a wide-ranging impact predicted, executives are beginning to seek ways to mitigate the effects of digital fragmentation. What executives do in the short term will determine how well they ride out this set of challenges. We highlight four key actions that business leaders can take to ‘recalibrate’ their digital transformation in response:

  • Add a new lens to the strategic process. Dedicate more resources to evaluating the business impact and responses. For instance, decide whether you need to reallocate investments and global functions differently across markets and jurisdictions. The good news is that the vast majority of the companies we surveyed ― 80 per cent ― said they already factor obstacles to globalisation in their strategic planning.
  • Map and de-risk data flows. Protect flows of information critical to management decisions and business operations. Assess how data regulations such as national cross-border restrictions and requirements will affect your business models. And re-evaluate where and how to maintain different types of data — which could mean trade-offs between security and ease of accessibility.
  • Build local advantage. Strike the right balance between centralisation and local investment. Organisations must become part of the fabric in the local economy within their key markets; this includes developing local talent and cultivating relationships with local technology partners and policy makers. The right degree of centralisation of IT strategies, processes and infrastructure across markets must also be assessed.
  • Use technology as part of the solution. Explore how emerging technologies can overcome challenges. For example, 3D printing can help manage global manufacturing activity more flexibly. Artificial intelligence can help address restrictions on talent migration, as well as help navigate increasingly complex regulatory regimes. And blockchain technology can provide more secure, decentralised and distributed systems for data protection and cybersecurity risks.

The good news is that business leaders are waking up to the realities of a more complex global digital operating environment. But the challenges ahead are not limited to boardroom decisions; they require responsible and proactive participation with policymakers in constructing the rules that will govern our digital future.

Armen Ovanessoff, principal director, Accenture Research
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