“It is our attitude at the beginning of a difficult task which more than anything will affect a successful outcome.” (William James)
Digital Transformation initiatives are everywhere, across all industries and markets. Even governments, designed to change slowly, are getting transformed. The latest industrial revolution, termed as Industry 4.0, is paving the pathway for such transformations. Like anything that needs transformation, there are significant challenges.
- Digital transformation initiatives take multiple years and big budgets. World Economic Forum estimates spent in IT is expected to increase 13% CAGR to $2.4T a year (survey of 16,000 companies across 14 industries).
- Harvard Business School says that mid-market organizations need to budget 3% to 5% of their top-line to transform their business.
- KPMG 2019 insights say that 46% of executives see ROI uncertainty as one of the top challenges in starting digital transformation initiatives.
- As per Wipro’s extensive study, Digital transformations take anywhere from 2 to 5 years and returns take a minimum of 16 months.
- The same Wipro study finds budget, people, technology and process are the key barriers to successful transformation initiatives. Initially people and processes are the key barriers.
- Wipro also reports that Organizations that can get past the initial barriers and align better with key stakeholders, early on, can see much better returns from their investments.
- Making this even more difficult, only 3% say there are cost savings (KPMG).
- IDG says that pace of technology change management runs ahead of workforce change management. Only 19% of companies surveyed, undergoing transformations, have a proper workforce change management strategy.
- The primary drivers are revenue growth, better customer experience and quicker time to market new products and services (Deloitte).
In a rapidly changing market these factors are extremely volatile and so signing up for a multi-year, multi-million dollar set of initiatives can rattle the stomach of even the transformative of executives.
The board room conversation that kills most initiatives
I have had the good (not being sarcastic) fortune to sit in at least 5 board room meetings to discuss go/nogo for digital transformations over the last 18 months for mid-sized corporations — companies ranging from $100M to $2B. My experience matches the numerous reports, journals and articles on this topic to the tee!
Here are some common questions…
“How much is this thing going to cost?”
What is a good ROI and payback period?
This is an IT project and needs to be prioritized alongside other business initiatives
Do we have the right people to make this happen?
Eventually the conversation veers into rat-holes and the discussion is punted to the next leadership / staff / board meeting.
Traditional ROI calculation
ROI calculation is really simple. It is a measure of the advantages or outcomes expected as a percentage of the total cost of the investment.
ROI = (Current Value of Investment — Cost of Investment) / Cost of Investment
“Current Value of Investment” refers to the proceeds obtained from the sale of the investment of interest. (Investopedia)
ROI gets challenging in multi-year investments and other measures like return rate, net present value can be used.
Whatever be the measure, the big challenge lies in figuring out such returns in digital transformation projects — the over-arching question is…
“Because digital transformation entails changing large portions of a business, even business models, how can we allocate specific spent to such diverse outcomes?”
ROI measures for Digital Transformation
PricewaterhouseCoopers has an ROI framework for Digital Transformation initiatives. You can find several such frameworks and models. These are definitely good. But the reality is that…
…most of ROI frameworks and models for digital transformation do not get the ball moving.
Trying to get powerful executives in mid to large sized organizations (that require such initiatives) to sign up for something transformational by agreeing to a general direction is challenging. I am not implying that leaders in such organizations are dysfunctional or not aligned — if they are it is even harder. The reality is that the future cannot be predicted in today’s volatile and rapidly changing environments and organizations are struggling to chomp off on long-term strategies.
What is the answer?
As I get through more transformation projects, I have seen that certain arguments help move the decision — one way or another about digital transformation.
- The ROI from digital transformation cannot be measured properly. The analogy is simple — if we want to, for example, attain sustained wellness in our lives, we need to invest in ourselves through new diet, exercise, sleep, stress management etc. How can we measure sustained wellness? Blood work? Weight loss? Other tests? And, how can we allocate additional spent in new diet to feeling better? The answer lies in changing our mindset.
- Digital ROI is a self-fulfilling prophecy. If organizations believe in it, they are able to work towards it and the results will follow which makes them believe in it even more.
- Story telling and organizational sensemaking brings calm and reasoning to such discussions — a lot of ROI discussions stems from emotion and anecdotal measurements.
- Creating a sense of urgency is a key driver. This is a balancing act — how to create urgency by showing a better future through transformation and convincing the organization that business as usual cannot continue anymore. The challenge here lies in the fact that creating this urgency should not create a sense of doom, spreading panic and anxiety across the ecosystem.
- Focusing on actions over numbers. This trips most traditional hierarchical organizations. Results and numbers are important. But they cannot be the primary focus. If organizations can focus on actions, especially through an agile, iterative approach, then they can make decisions as they go along. This helps move the ball down the field, one yard at a time, rather than sitting in the sidelines debating about ROI.
- Lastly, it is important to realize that results are only temporary. They change almost immediately after we measure them. They help us create goals and fighting towards them. But we cannot control the results. We can only control our actions.
Wrapping it up
So, the best way to measure ROI for transformation projects is to figure out how we can measure our actions that drive us to transform the business. Such actions should be continuously prioritized to ensure we are only doing value-added work against set objectives.
In the end, the sustained wellness can only be attained if we start acting. I tell organizations that the time to plan is over. To stay relevant in their industry and become market leaders, it is important to get started, one way or another. Status quo is no longer an option and the real world is happening outside the walls of the meeting room. Getting caught in ROI discussions is also a self-fulfilling prophecy — one that will stay inside the walls of the board room.
I am a transformation consultant, an Agile coach and a lean junkie and I spend a lot of my time researching organizational culture. I enjoy dabbling with new technology to solve business problems. In anything I do I try to go about with Agility. Would love to hear thoughts on this. Anyone else struggle with ROI discussions for transformation projects?