The Digital DivideBy
Information technology (IT) and digital technologies are touted as key growth drivers in a global economy, but so-called digital fragmentation is seen as a barrier to growth. So what is digital fragmentation, and what is its impact?
Digital fragmentation is defined as the rise in restrictions on the free flow of data, IT products, IT services, and IT talent across country borders. A new report by Accenture that surveyed more than 400 chief information officers and chief technology officers examines how companies are seeking to adapt global strategies and operations.
A new report from Accenture says that “digital fragmentation,” defined as the rise in restrictions on the free flow of data, IT products, IT services, and IT talent across country borders, is disrupting the global business environment and could inhibit companies’ strategies for growth and innovation. The report argues that national policies causing “digital fragmentation” are often created with good intentions, such as improving data privacy and cyber security. It maintains that greater collaboration between companies and governments can help such policies meet their objectives while stimulating, rather than inhibiting, innovation and the use of new technologies.
Barriers to growth
The report reveals that 74% of more than 400 chief information officers (CIOs) and chief technology officers (CTOs) surveyed expect to exit a geographic market, delay their market-entry plans, or abandon market-entry plans in the next three years as a result of increased barriers to globalization. The survey was conducted to 402 CIOs and CTOs in Brazil, China, Germany, Japan, India, South Korea, the United Kingdom and the United States. Industry sectors represented include services, technology, manufacturing, resources/commodities, retail/distribution, and digital platforms. Approximately 38% of the companies had annual revenues between $250 million and $4.9 billion; 36% between $5 billion and $19.9 billion; and 26% have annual revenues of at least $20 billion.
The report says that the number of restrictive trade measures adopted by G20 members (an international forum for the governments and central bank governors from Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russian Federation, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union) quadrupled from 324 in 2010 to 1,263 in 2016. The number of countries with data-privacy laws has tripled from 34 in 1995 to more than 100 in 2015.
As a result of such developments, the trend of “digital globalization,” enabled by the free flow of data, is giving way to “digital fragmentation,” says the report. More than half of the business leaders surveyed believe that the increasing barriers to globalization will compromise their ability to: use or provide cloud-based services (cited by 54% of respondents, versus 14% that disagree); use or provide data and analytics services across national markets (54% versus 15%); and operate effectively across different national IT standards (58% versus 18%).
“Moves against globalization are forcing companies to make fundamental changes to key strategic and operational plans across global IT architectures, the recruitment of IT talent, the physical location of IT and cybersecurity,” said Omar Abbosh, Accenture’s chief strategy officer, in commenting on the study. “Regulation can provide critical safeguards in the digital economy. But it should be designed to stimulate, rather than inhibit, growth and innovation. Stronger dialogue between business and government is required.”
According to the report, more than half of business leaders surveyed believe that these increasing barriers to globalization will force their companies to rethink their: global IT architectures (cited by 60% of respondents); physical IT location strategy (52%); cybersecurity strategy and capabilities (51%); relationship with local and global IT suppliers (50%); and geographic strategy for IT talent (50%). Ninety-one percent of survey respondents also expect increasing barriers to globalization to raise IT costs over the next three years. Areas most affected will be sourcing inputs such as IT talent; the need to multiply IT infrastructure, such as data centers; and compliance with multiple national IT standards.
“Contrary to the rhetoric of many digital evangelists, national borders do matter,” said Armen Ovanessoff, principal director at Accenture Research, in commenting on the study results. “Business leaders are waking up to their responsibility in helping shape the rules of our digital future. Given the transformations taking place in artificial intelligence, bio-technology and the Internet of Things, it’s clear that this is just the beginning of a complex journey that demands cross-border and cross-sectoral cooperation.”
Many companies are beginning to plan their response to increasing fragmentation, according to the report. Four in five (80%) of the companies surveyed said they are already factoring obstacles to globalization in their strategic planning. About half (51%) are already reorganizing their global IT architectures and governance structures in response. Two thirds (67 percent) are now investing in automation to offset labor restrictions.
Best practices for digital transformation
The report makes four recommendations to help business leaders recalibrate their digital transformation as outlined below.
Add a new lens to the strategic process. The report suggests to dedicate greater resources to reviewing business impact and responses. For instance, should the company reallocate investments and global functions differently across markets and jurisdictions?
Map and de-risk data flows. The report recommends protecting flows of information critical to management decisions and business operations. The report recommends to companies to assess how data regulations, such as national cross-border restrictions and requirements, will affect business models. 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. The report points out that striking the right balance between centralization and local investment is vital. It points out that organizations must become part of the fabric in the local economy within their key markets; this includes the development of local talent and the cultivation of relationships with local technology partners and policy makers. The report further suggests that the right degree of centralization of IT strategies, processes and infrastructure across markets must also be assessed.
Use technology as part of the solution. The report points out how new IT technologies, can be effective. For example, 3D printing can help manage global manufacturing activity more flexibly. Artificial intelligence can help address restrictions on talent migration. And blockchain technology can provide more secure, decentralized and distributed systems for data protection and cybersecurity risks, according to the report.