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disruption

Building businesses for the digital future

The Fourth Industrial Revolution brings new challenges and opportunities – but what does it take to succeed in the digital economy?

Steam power and factories were the hallmark of the first Industrial Revolution, but what will be the legacy of the latest? So far, this century has seen the development of cloud computing, advanced robotics, artificial intelligence and big-data analytics. Industries have been disrupted, new ones have emerged, and the handbook of commerce has been rewritten.

The technology sector has been quick to seize the opportunity, with Apple, Alphabet and Microsoft topping the list of the world’s largest publicly traded companies. Close behind them are Amazon, Tencent and Alibaba – online retailers that have seized digital opportunities to blow their brick and mortar competitors out of the water.

All sectors have been affected in some way by the digital economy. The likes of Uber and Airbnb have hit the headlines, while the world of finance is coming to terms with blockchain’s distributed ledger technology. But while there are clear winners, others are being left behind – too slow to adapt and too reluctant to embrace change.

“The pace of change and innovation is a big challenge for businesses. They’re scared that if they don’t react, if they don’t change, they won’t exist,” explains Brian Peccarelli, chief operating officer, Customer Markets, Thomson Reuters. “Everyone’s looking to see what giants like Amazon will do next. But waiting and seeing is one thing. Wait too long, and the opportunity is gone. Yet to act quickly you have to ensure you’re fully equipped to navigate the numerous challenges and complexities. So it’s a real challenge.”

A changing regulatory landscape

The complexities of the digital economy don’t stop at commercial risks and opportunities either. Regulators are monitoring developments closely and taking advantage of technological advances as they seek to reduce the amount of tax lost through avoidable error. In the UK, for example, Making Tax Digital is a key part of the government’s plans for businesses with a turnover above the VAT threshold of £85,000, while the likes of Italy, Spain and Brazil are pressing ahead with e-invoicing legislation.

Businesses should be aware that against this backdrop, the value of fines imposed by audit body the Financial Reporting Council in the UK, for example, has jumped from £14.59 million in 2016/17 to £17.96 million in 2017/18, a rise of 23%.

The business landscape is clearly in a state of constant flux when it comes to tax. Take Amazon, for example. As a trailblazer for the digital economy, it is being closely monitored by regulators, not least in the way its business model challenges existing laws and regulations – and particularly where tax is concerned.

Already this year it has successfully fought off a tax, imposed by Seattle City Council on local businesses making more than $20 million a year, of $275 per employee. In Australia, meanwhile, rather than try to collect the country’s Goods and Services Tax (GST), Amazon intends to force locals to shop only at its Australian store, rather than Amazon.com. Luxembourg, meanwhile, has famously been described as the “Death Star of financial secrecy”.

The growth of the digital economy led to – and facilitated – the OECD’s base erosion and profit-shifting (BEPS) project, which is attempting to reform the international tax system by encouraging governments to close loopholes, improve transparency and “better align rights to tax with economic activity”.

Retailers are also coming to terms with the U.S. Supreme Court’s verdict in South Dakota v. Wayfair, which overturned a ruling that internet sellers only had to collect a state’s sales tax from buyers if the company had property or employees in a state. The Supreme Court’s Justice Anthony Kennedy has estimated that states have missed out on $33 billion in lost revenues. Several states now seem likely to follow in South Dakota’s footsteps as they chase e-commerce tax dollars. Until the situation becomes clearer, there is likely to be a period of further uncertainty for internet retailers, both in the U.S. and abroad.

Seizing the opportunity

Businesses are also coming to terms with GDPR and privacy issues, while there are concerns over access and inclusion as we move to a global digital economy. The UK, for example, has some 1.5 million citizens without a bank account and who only exist in the cash economy. Clearly, these people will struggle to receive the same advantages offered by the digital economy because they are denied even the most basic access to it.

Countries like the UK will do well to learn from one of the leading countries in embracing the digital economy: Estonia, where around 95% of all tax declarations are filed electronically and the testing of driverless cars is an increasingly common sight.

Such a digital-friendly environment arguably contributed to Estonians playing a key role in the development of Skype, the ‘freemium’ service that specializes in video and voice calls between computers, tablets and mobile devices. The app was released in 2003 and just two years later was acquired by eBay for $2.6 billion. In 2011 it was sold to Microsoft for $8.5 billion.

The numbers illustrate that the opportunities presented by the digital economy are great. It also goes to show that if you can’t develop your own skills, the alternative is to buy in the expertise.

FinTech illustrates this perfectly. The sector is currently a hotbed of acquisitions and investments. BlackRock, the world’s largest asset manager, has taken a stake in robo-adviser Scalable, for example, while Goldman Sachs has acquired Final and Clarity Money and American Express has snapped up Mezi and Cake Technologies.

Preparation is key

But are there other ways to stay one step ahead in this complex, volatile, fast-moving environment? Finnish company Futurice advises large companies on digital strategy and innovation culture, and chief artificial intelligence officer Tuomas Syrjänen urges them to try a new approach.

“Addressing uncertainty is a business imperative,” he says. “Most companies accept this, but they deal with it in the wrong way: they start with strategy. But the current climate requires different processes and tools. The starting point for digital is experimentation. Based on the insights gained from the experimentation, businesses develop options and then iterate a strategy.”

Another option is to hire the best talent. Andela, a company based in New York, trains software engineers in Africa so they can work remotely in US companies – thus tapping into an overlooked talent pool. With more than 1,000 employees and $80 million in funding from the likes of Mark Zuckerberg and Priscilla Chan, Andela was recently listed in the Wall Street Journal’s top tech start-ups.

Andela CEO Jeremy Johnson says: “Over the past three years, we’ve helped prove to the world that brilliance is evenly distributed. Increasingly, African technologists will be launching high-impact companies and solving some of the world’s most pressing problems.”

Peccarelli says Andela is a prime example of how the world is changing:

“It’s hard to understate the impact of the digital economy,” he says. “I fell in love with technology a long time ago. It changed my whole course and shaped my philosophy. But it’s a complex issue for business and senior leaders who need to take some very big decisions if they are to be successful. You can’t predict tomorrow, but you can prepare for it.”


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