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Digital transformation: How to beat the funding challenges
Executives continue to struggle with how to fund digital transformation projects. Let's examine three funding pitfalls and approaches that avoid them
IT modernization and digital transformation are multiyear journeys that require enormous change to reinvent the business and create new value for customers, employees, and shareholders. Typical transformation initiatives aim to help an organization stay within the budget and complete projects on time. Although these goals help when you’re trying to achieve a return on investment (ROI) by performing a process better, these are not relevant goals when you’re aiming to do something different.
[ What must CIOs bring to transformation work? Read Peter Bendor-Samuel's related article: Crucial CIO skills for digital transformation success. ]
Everest Group’s study on digital transformation readiness reveals dramatic differences in value created by the most successful organizations, which we call Pinnacle Enterprises. (These 21 companies in our study achieved superior transformation results, by investing in resources including adequate funding for digital transformation.) Consider these outcomes, for instance:
- In 86 percent of the Pinnacle Enterprises, the IT organization enabled the enterprise to serve a new market or customer segment (versus 43 percent of the other enterprises we studied).
- In 85 percent of the Pinnacle Enterprises, the IT organization supported significant growth of current products/services (versus 33 percent of the others).
- The Pinnacle Enterprises invested in innovation labs (81 versus 36 percent), digital studios for new product development (71 percent versus 27 percent) and innovation funds to support start-up activities (76 percent versus 35 percent).
Compare these outcomes to the funding challenges that three other companies – all leaders in their markets – encountered during their transformation initiatives:
- The modernization initiative of a retail bank included establishing a digital, agile lab environment that could deliver work quickly in six- or eight-week sprints. But the budgeting approval process slowed down the work in the lab. The bank recognized the issue and subsequently replaced its annual budget funding structure with an iterative funding structure.
- In a review of its completed digital transformation project, a quasi-government agency recognized it neglected to spend time up front engaging with the workers in field offices to get them on board and committed to change. In reviewing the initiative, the senior executive stated that this effort would have resulted in less resistance to change, faster rollout, and better feedback about the new product. But the agency had allocated no funding for that activity.
- A company implementing Robotic Process Automation realized its optical reader (OCR) was not of sufficient quality to create reliable data. Although it was good enough for humans, it was not good enough for a robot. But the budget allocated no funds to replace the OCR technology, and it was in a different department, which had no interest in changing it.
Pitfalls in funding transformation initiatives
Let’s look at three big funding pitfalls.
1. Business Case and ROI. Typical funding models don’t work in modernization and IT digital transformation because they focus on achieving a specific business case established at the beginning. The problem: business cases depend on assumptions around how quickly the company will realize the ROI. Those assumptions often turn out to be wrong in a multiyear journey starting with many unknown factors.
2. Budget Timing. Another pitfall: Most companies plan capital budgets for technology and similar investments at least six months to a year in advance.
3. Budget Control. In many companies, capital budgets are handled by a centralized group rather than business units. But redesigning a business to create new value requires significant capital reallocation across business and functional units. That is difficult because it requires collaboration and integration of functions, and most functions resist this type of change.
You can avoid these pitfalls with the right funding approach, however.