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Digital transformation age ROI: 3 ways to measure
Calculating ROI is harder in the digital age. For example, dismissing wild west investments almost guarantees an established company a slow, controlled demise
In the digital world, speed to market is king and the shelf life of a great product or service is much shorter. Mix in some accounting rules around capex versus opex spending, plus the social optics of an investment, sometimes referred to as social return on investments (SROI), and things get complicated real quick.
There are many ways to group ROI impact. Let’s break down three of the most common.
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Why ROI calculations still matter
Simply put, ROI calculations help determine the best use of a financial resource.
For example, if I have two investment options – Option A and Option B – and A returns five percent and B returns seven percent over the period of a year, the math tells me that B is my best option.
Historically, companies have had well-defined guidelines around ROI calculations. For instance, any new business investment needs to have a positive return within X months and ROI of at least Y percent. If these two requirements aren’t met, no investment is made. It was all fairly straightforward.
But now there are additional factors that should also be taken into consideration when considering ROI. Below I’ve categorized three ROI use cases in a way that somewhat mirrors the three horizon model made popular by Geoffrey Moore and others.
3 ROI use cases in the age of digital transformation
1. Established use case:
For established product lines where investment costs and the market are well understood, the ROI is straightforward, meaning the number of months to a positive return and the minimum percentage of return are static. In this case, the impact of the age of digital transformation is minimal. The majority of an established company’s (think publicly traded or in business for 20+ years) investments happens here.
2. Technology enabled by an established company use case:For new products where technology is a significant enabler, time to market is critical, and the possibility of growth is high, the ROI might be more elastic. That means the minimum percentage of ROI expected might be reduced and the amount of time to a positive return might be extended. This is especially so if the social optics of the investment seem beneficial.
For an established company, there is still accountability for the percentage of ROI and length of time to a positive return, but to compete in the age of digital transformation, some flexibility is required to remain relevant.
3. Wild west use case:
In this use case, the products are typically new to market and the companies are relatively young. Traditional ROI thinking often takes a back seat to a company’s valuation. Factors like going public or hoping to be acquired are at the forefront and the net profit and cost of investment have less impact on decision-making.
Instead, factors like time to market, revenue, and year-over-year growth numbers are what matter most. The evidence can be found in most industry surveys, which show that the cost of a platform is less important than access to technology, access to new markets, and business agility. Some suggest that an established company should invest 10 percent in these types of use cases to have a healthy future.
Justifying the wild west investment
If you’re tasked with making the case for an investment, it’s your responsibility to ensure the decision is made in the context of the correct use case (as defined above). For example, if you’re an established company, there needs to be another team within the company focused on keeping the company’s products and services relevant to the market. This separate team needs to remind the leadership team that the wild west use case is the most appropriate lens for this type of investment.
At a micro-level this is an internal “venture capital” investment, so the normal ROI rules shouldn’t apply. Wild west investments might seem a bit uncomfortable to the traditional ROI system, but dismissing them almost guarantees an established company a slow, controlled demise.
ROI still matters. It’s just much more complicated to measure in the age of digital transformation. But when viewed through the lens of three use cases above, you can be more confident that your investments are pushing your business in the right direction.
[ Read also: How to measure IT ROI in the digital era. ]