By Reuters Plus
The exponential growth in digital connectivity and data, fast-tracked by the pandemic, has upended traditional business models and revolutionised the way companies sell products and service their customers.
Data and connectivity are now the lifeblood of competitive advantage in business and keeping pace with constant digital innovation is essential to remain relevant.
Prior to the global health crisis, Harvard Business School research revealed that organisations ranked in the top quartile for digital transformation deliver better gross margins, earnings and net income than companies in the bottom digital quartile.
This gap between digital leaders and digital laggards widened significantly during 2020, as consumers, employees and students came to rely on connectivity to shop, work and study.
Smart organisations with an eye for opportunity have seized the moment to deploy network-centric data strategies to differentiate themselves from the competition, using predictive analytics to inform decision-making and adapt operating models.
Post-pandemic data from a McKinsey survey, reveals that deployment of digital services and products leapt forward by seven years in just a few months in 2020 to keep up with customer demand.
There “is no going back”, says Craig Scroggie, CEO of NEXTDC, the ASX 100-listed data centre operator. “A new baseline” for internet and data consumption has been set.
“During the pandemic we have undertaken the single largest global work-from-home experiment in history. This has accelerated change in the way organisations consume their digital infrastructure services,” Scroggie says.
Digitisation has effectively broken down sector silos. As a consequence, all companies, irrespective of industry, have had to build greater digital capability and infrastructure to maintain competitiveness.
Not surprisingly, digital first companies have led the way – Apple, Microsoft, Amazon, Google’s parent Alphabet and Facebook are now the five largest companies in the S&P 500 – and have used their technologies to displace competitors in media, advertising and retail, among other industries.
Businesses in more traditional sectors, such as industrials and manufacturing, have had to adapt and innovate, too. London-listed pest control business Rentokil, for example, now uses sensors in its mousetraps to monitor their effectiveness via a data dashboard; while German steel and metal distributor Klöckner & Co has installed an AI-powered platform to streamline its ordering process.
Perhaps most profound has been the impact on retail. In an interview with The Australian online retail entrepreneur Ruslan Kogan explains how his homeware and electronics platform Kogan.com is as much a data analytics business as it is a retailer. Kogan.com uses artificial intelligence and data tools to build complex customer profiles, understand demand and tailor marketing messages accordingly.
The pace of digital change has obliged all businesses to reshape the processes they use to deliver for customers and respond to their needs.
“Ten years ago, information was shared via email attachments. We were swimming in documents. There was no data visualisation and no data drill down functionality,” says Justin Partington, Group Head of Funds at IQ-EQ, a fund services business administering USD 500 billion of assets.
“The rapid transformation of digital infrastructure has enabled us to provide self-service data that clients and their investors can access and analyse.”
Alongside the strategic considerations that come with embracing digitisation, organisations are also reviewing what this means operationally, and the investment required to put the necessary digital infrastructure in place to deliver in an environment where software as a service (SaaS), apps and dashboards are standard expectations.
Cloud computing has become a cornerstone of accelerated digitisation, allowing end users to access content and services wherever they are, without having to go through company networks.
Demand for cloud computing was already rising pre-pandemic but soared during lockdowns as companies rushed to increase capacity.
According to research consultancy Gartner, cloud-based services are expected to increase their share of global enterprise IT spending from 9.1 per cent in 2020 to 14.9 per cent by 2024. A Gartner survey also finds that 70 per cent of organisations already using cloud services plan to increase their cloud budgets following the pandemic.
Migration to cloud-enabled services and data, however, is complex.
Chris Robinson, Group Chief Information Officer at IQ-EQ, notes that in highly regulated industries, such as financial services, there are still requirements to hold certain data on servers that are kept on premises.
“Our default is to use cloud solutions wherever possible, but regulation moves slower than the pace of technology. For regulatory reasons several users still need access to onsite servers,” Robinson says.
“When a cloud solution is an option, we also need to ensure the cloud and data centre providers we use are able to serve clients from multiple jurisdictions, as many clients are legally obligated to use data centres located locally.”
In addition to understanding what data can and can’t be moved into a cloud environment, there are other operational considerations to factor in, such as legacy systems.
“Transitioning from an on-premises solution to a cloud-based option is complex. As well as the restrictions on what data can be served from the cloud, legacy software won’t always operate on new cloud platforms,” Robinson says.
“It is still necessary to provide the optionality to bolt-on cloud-based capability to on-premise infrastructure, and understand what the parameters are for doing that.”
Wayne Bonett, Head of Secure Network Services at Westpac, adds that on-premise capability will remain a crucial part of IT strategy. He believes the key to building long-term resilience into digital infrastructure will be finding ways to connect cloud, data centre and on-premise resources efficiently.
“Even before the pandemic we spent a lot of time thinking about the structure of the network and invested in a network of regional data hubs, so that employees or customers accessing a cloud-based application in Melbourne do not have to wait for the request to run all the way to Sydney and back,” Bonett says.
“That investment has served us well over the last 12 months. Cloud architecture, and how organisations connect into the cloud, are going to be very important for all organisations.”
Meeting data demand
Even in the face of these complexities, there is no stopping the transition to new digital infrastructure, which means investment in new data centre and computing platforms will be required to meet rising levels of demand.
“There is a baseline of capacity that has to be built and reinjected into the system to allow us to meet the next phase of demand,” Scroggie says.
According to 451 Research, cloud service providers are set to build 2.1 million new IT racks by 2025 at a cost of USD 62 billion to service digital access needs.
Rolling out this new capacity at pace will pose challenges. Scroggie says it can take between 18 months and two years to complete the build on a new data centre. However, investor appetite to finance data centres and cloud-based services has never been stronger.
The growth in data consumption and the business-critical position of digital infrastructure has seen the appeal of data centre and cloud assets expand.
Again, according to the 451 Research the value of M&A activity involving data centre and managed services companies almost tripled year-on-year in 2020, rising to USD 10.2 billion for the 12 months to the end of September last year from USD 3.5 billion over the same period in 2018/2019.
“Data centres and cloud were certainly not as ubiquitous a few years ago as they are today,” Scroggie says. “There was historically a lot of private equity capital supporting data centres, as they were seen as providing high returns on capital, albeit a bit more risky, given they were largely enterprise and outsourcing focused.”
Private equity firms remain active in the space, attracted by the still high compound annual growth rates (CAGR) in the sector.
The backing of “AA+ credit-rated global cloud behemoths” has seen sovereign wealth funds and other institutions, that historically invested in traditional infrastructure projects with high barriers to entry, like towers, roads, rail or ports and other industries, moving into the data centre space.
Scroggie says that with data centres securing “weighted-average lease expiries of up to 15 years” data centres now offer investors more attractive options to lock in long-term yield.
Sovereign wealth funds (SWFs) and infrastructure funds have been among the most active dealmakers in the data centre space. Examples include Australia’s AUD 168 Future Fund, which made its largest ever direct investment in the data space in January 2020 by taking a 24.1 per cent stake in Canberra Data Centre for an undisclosed sum. Singapore’s GIC also announced a USD 1 billion joint venture with US-based data centre operator Equinix in April last year to build data centres in Japan.
"The last 12 months have underscored how crucial fit-for-purpose digital infrastructure has been for organisational resilience,” concludes IQ-EQ’s Justin Partington.
Now the digital highway is moving at top speed and driving the ever-increasing momentum of organisational transformation, digitisation looks set to produce plenty of growth and opportunities for businesses and investors in the years ahead.
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