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What Benefits and Challenges Does Digital Transformation of the Middle East Involve?

Digital TransformationAccording to a recent analysis posted by Global Risk Insights (GRI), the Middle Eastern countries are gradually approaching a digital disruption with these nations starting to prioritize the development of high skilled, service-oriented private sectors because they recognize the unsustainability of national economies underwritten by goods such as oil. This development can be achieved only through increasing application of digital technologies focused on networking, computing and storage. Digital growth in the Middle Eastern nations is also hindered by laws and regulations regarding data privacy and sharing. This makes it difficult for them to utilize business process outsourcing services or outsourced solutions that involve sharing of data. Organizations need to evolve to address the changing business landscape. The business IT field is growing rapidly and the advancement of technology in cloud adoption, big data, software defined networking, IoT, virtualization, threat detection and security has increased the demand for data sharing and constructive collaboration. The reality is that most companies or industries are optimized for the environment where they already operate. When anything in that environment changes, be it quickly or over time, companies or organizations find it difficult to adapt to the new changes.

The Middle East already exhibits strong digital penetration and in regions like UAE, Qatar and Bahrain the smartphone penetration is over 100 percent. The growth of internet usage in the Middle East is mainly due to social media. The regional social media use grew by nearly 50 percent in the past year, even accounting for growth in conflict zones like Syria, Yemen and Sudan.

According to McKinsey & Co, cross border data flows between the Middle East and the rest of the world have also increased 150 fold in the past decade. McKinsey Digitization Index shows that the Middle East has yet to satisfy the full potential of digital penetration especially in business and in government. Governments in the Middle East obviously aim to make the most of their digital economic output. Digital inputs in Middle Eastern economies only account on average for 4.1 percent of regional GDP, making up 8.4 percent of the region’s digital potential. National economic transformation programs planned in countries like Saudi Arabia, Qatar, Egypt and the UAE require expansion of smart cities, e-commerce and automation-driven industries. The estimated government expenditure is $11.6 billion on IT products and services in 2017, according to Gartner.

The digital transformation not only offers advantages, it also poses risks and challenges.

  • Almost all Middle Eastern nations are moving towards digital transformation and e-commerce is one proven digital growth area that will likely expand in the short to medium term. It can even provide employment opportunities for women entrepreneurs and disenfranchised youth who are often excluded from the traditional Middle East workforce.
  • Cloud computing, internet-enabled devices and 3D printing that can automate business tasks as well as large scale industry operations are likely to become dominant.
  • This has particular relevance for the energy and construction sectors where around 40 percent of tasks could be automated.
  • They can also affect the flourishing banking sectors in Bahrain, Qatar and Jordan where digital applications can automate payments, data processing and customer interactions.

McKinsey estimates that the ensuing digital productivity gains can improve companies’ bottom lines by more than 50 percent over five years. This in turn could ultimately improve the Middle East’s economic growth by speeding up its diversification away from conventional oil and gas.

So what are the challenges?

Regional consumer demand for digital applications is strong. However, IT investment is still reliant on the revenue and business confidence associated with high oil prices. This is particularly relevant in the Gulf, where decreased oil prices over the past years have put off the public and private sectors from investing resources in IT projects that may only payoff in the have long run. Consequently, there may be uncertainty in the short term pace of regional digitization.

Another challenge is the nature of the Middle East business climate.

  • The Middle East is deficient in the venture capital funding necessary to bring IT startups to adequate scale and profitability.
  • A number of businesses are state affiliated or family run. These enterprises with concentrated ownership and complete equity share may discourage local entrepreneurs from establishing companies that digitally challenge an industry’s culture and operations.

Digital TransformationPolitical obstacles comprise another major challenge along the path of digital growth. Middle Eastern governments do not trust third parties with their data. This minimizes the use of digital solutions that rely on outsourced solutions such as third party cloud storage. This lack of trust is evident in the private sector as well because often governments are the majority investors in private businesses. Stringent laws and regulations regarding data privacy and sharing can create compliance risks for both the users and the suppliers of digital applications.

Another major challenge is the lack of digital talent and youth unemployment. The governments are taking steps to minimize this by providing technical education to the youth.

As in any other country, digitization that brings along with it automation, could displace many workers and also bring wage reductions. This threat is especially there in the energy and construction sectors that have recruited a number of workers from non-Gulf countries.

Digital transformation of the public sector could bring important opportunities for the MiddleEast. “Smart government” initiatives could improve government IT infrastructure and talent,and help offer public service through digital means. McKinsey points out that only six percent of Middle East countries have elements of digital smart government, led by UAE with their Smart Dubai and Smart Abu Dhabi programs. Saudi Arabia has the objective to raise its UN E-Government Index to among the top 5 nations by the year 2030. Oman, Jordan, Qatar, and Bahrain have similar objectives. All these countries plan to reorganize government institutions via electronic services.

Smart Middle Eastern governments will have many advantages.

  • Using digital payments could ensure both internal and external government financial transfers are correct and easily auditable.
  • Automating government human resources operations and developing mobile applications to deliver social services and public information to citizens could reduce government personnel and overhead costs.
  • Easy accessibility of information and services would improve citizens’ satisfaction and civic mindedness and improve political stability over the long term.

Digital disruption brings with it many new opportunities and benefits for any country. There may be risks as well, which if well-handled needn’t be threatening. The public and private sectors must take effective measures to counter the economic, political and cyber security risks that are likely to arise with digitization and the use of outsourced solutions. The tangible advantages that digitization can ensure will be in direct proportion to the extent to which the government and private sector can bear up with the perceived risks.

About Rajeev R

Rajeev R

Manages the day-to-day operations of MOS from NY. With an interest in information technology, Rajeev has guided MOS to extensive use of digital technology and the internet that benefits MOS as well as MOS clients.