Opinion

Thu 26 Mar 2020 | Eric Dynowski

Few organisations argue with the necessity of digital transformation; unfortunately, almost everyone would argue about what exactly “digital transformation” means

Now that many organisations are several years into their digital transformation efforts, that lack of definition has become a problem, in part because we’ve gotten to a moment where many leaders are curious about the ROI of their digital transformation initiatives – and rightly so. No major project should be undertaken without a clear sense of how to measure its ROI.

It is, however, impossible to calculate ROI without an agreed-upon definition and a tangible, consistent goal. That may sound basic, but a lot of organisations launch digital transformation initiatives without agreeing on those two things. Here’s how to think about ROI if that’s the boat your organization finds itself in.

The 3 things you need to calculate the ROI of digital transformation

When it comes time to assess the performance of your digital transformation initiative, the first thing you need is a clear definition of what digital transformation means for your organization. Without a definition that everyone in your organization agrees on, you won’t be able to determine whether you’ve finished, never mind how the initiative is performing.

While defining digital transformation in the abstract can be hard, it’s often easier to define the exact things you’re doing that constitute digital transformation. For example, maybe you wanted to move from on-prem servers to a data centre or eliminate paper from key processes. Whatever specific element you’re transforming, get everyone on the same page about its parameters.

The second thing you need is a goal for your transformation.

This will be crucial in calculating ROI, because not every initiative has the goal of reducing costs or increasing revenue. Some initiatives, for example, might be essential just to keep you in line with customer or partner expectations – say, improving data security to come into compliance with new legislation. Again, goals can vary widely; the key is to get relevant stakeholders into agreement.

Finally, you need to do some legwork. ROI calculations can be extremely complex. Before you can determine whether a given initiative is ROI positive, you’ll have to identify the many factors that affect potential outcomes.

For example, if your goal is improving data security for compliance reasons, you’d have to consider…

The cost of making changes to come into compliance.

The likelihood that you would have suffered a data breach or been fined for a violation.

The likely cost of those breaches or fines.

The potential cost in reputational damage to your brand if you were fined or hacked.

The cost of PR and marketing efforts to regain brand affinity following a fine or hack.

… and so on.

Even when you have alignment within your organization about the definition and goals of your digital transformation project, calculating ROI is not simple. If you try to simplify those calculations, you could end up doing more harm than good. Let’s take a look at some common examples to understand why.

Common digital transformation goals and how to calculate their ROI

While every organization is different, there are several common types of digital transformation initiatives large organisations undertake – even if they don’t define them that way at the outset. Here’s a high-level view of four common efforts, along with the necessary thinking for ROI calculation.

Example 1: Increasing the value of your data

This is a fairly straightforward digital transformation objective. If you’re looking to increase your data’s value, you might sell it, use it to improve product development, use it to shorten lead time, use it to get to market with new products faster. Or maybe you’re generating new revenue streams by using data to offer new services to existing customers.

Once you define which of those things you’re doing, you can calculate ROI by determining whether the amount you invested in backend changes is less than the additional value you’re getting from the new ways you’re using your data.

Example 2: Digitising business processes

Your digital transformation initiative probably falls into this bucket if you launched it because your people were frustrated with antiquated processes that required a lot of paper or otherwise “shouldn’t have been that way.”

Maybe these processes existed long before anyone thought of digitising and the transformation was about overhauling them. If this sounds like you, your ROI calculation will have to consider questions like these:

Can the process be mapped?

Can its elements be digitized?

What is the cost vs. ROI in improving speed or efficiency?

What is the cost vs. ROI in lowering error rates?

Example 3: Everything as a service

This is a common digital transformation type for organisations that are trying to compete against cloud data companies and net new entrants that operate on the EaaS model. In reality, though, it’s difficult to transform an organization from a traditional products-and-services model to an EaaS model.

That isn’t to say introducing “as a service” capabilities should be off the table. What we’ve found, though, is that an evolutionary, rather than revolutionary, approach, tends to work best. For example, it may make sense to transition from non-connected products to “smart” or connected products; with that change will come the opportunity to introduce new related “as a service” options to your offerings.

The ROI calculation, then, becomes a matter of measuring the cost of transition versus the revenue driven by newly introduced capabilities. That’s why a gradual approach tends to work: by introducing “as a service” functionality in small doses, an organization can figure out what works best for it and its customers, then scale up based on those learnings.

Example 4: Reducing complexity

Digital transformation efforts aimed at reducing complexity tend to have one of two manifestations: either an organization has determined that it’s too hard to do what it does given today’s market conditions or it’s doing a lot but that work is not delivering enough value.

In both cases, the goal of reducing complexity is to create a more consistent and sustainable value model for the business. To determine ROI, it’s important to define where the value transfer is going: to shareholders? To customers? To other stakeholders? Again, there’s not a wrong answer; the key is to clearly define it within an organization.

Once you’ve defined where the new value should be present, the ROI calculation involves comparing the cost of the transformation to the savings (and, hopefully, increased revenues) that result from the new workflows it enables.

For clearer digital transformation ROI, get back to basics

While requests for calculating a digital transformation initiative’s ROI may feel like they come out of nowhere, ROI is a healthy and normal thing to seek for any initiative. The key to handling these questions well is to remember that not all positive ROI translates to increased revenue. In some cases, a positive ROI means being able to stay relevant in your marketplace or preventing future losses.

It’s also key to remember that calculating ROI is a two-part process: you have to both calculate the cost of the transformation and compare that with the transformation’s outcome. To do the former, you’ll need to track various data points throughout the project, which means it’s best to identify your desired outcomes – and the data points you’ll use to track them – at the start of your transformation.

If the onus is on you to calculate and report ROI of your organization’s digital transformation initiative, then, start from the beginning: focus on defining the reasons you launched the initiative and what your goals were (or are). From there, it will be much easier to determine what to track to determine whether you’ve reached those goals and how you can improve your ROI to date.