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How to measure IT ROI in the digital era
IT ROI metrics used to focus on efficiencies; today they should speak to revenue and customer experience. Consider these specific metrics in three categories: Strategic impact, operational impact, and cost impact
As organizations travel further down the road with digital transformation, the measures of IT success must change. While IT cost reductions and increased efficiency may still be part of the equation, business leaders are increasingly looking for a bigger bang for their technology buck – including increased revenues and profits or differentiated customer experiences.
“This is largely because digital transformation is not merely about improving IT initiative but predominantly about changing the overall business into one that is more responsive to stakeholder (customer, employee, and business partner) needs and one that is more competitive,” says Cecilia Edwards, partner at management consultancy and research firm Everest Group.
Cost efficiency is now seen as a given, says Edwards, and no longer as a primary goal. In fact, she adds, in some cases, IT may need to take on an increased cost burden in order to enable new capabilities or efficiencies in the business.
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How IT ROI metrics fuel digital transformation wins
While more CEOs are holding technology leaders accountable for business results, says Shafqat Azim, a partner in the Digital Practice at technology research and advisory firm ISG, measuring ROI in new ways is challenging. ISG has found that 88 percent of large global enterprises have digital transformation initiatives underway, with projects totaling over $2 trillion in investment. However, just 16 percent of these initiatives are what ISG categorized as thriving, and 40 percent of them are abandoned.
“Many organizations are struggling to make critical business decisions due to a lack of comparative analytics and visibility into the effectiveness of digital transformation,” Azim notes. “The pace of adoption and business impact of their digital programs can be difficult to measure.”
Metrics are essential for IT leaders to determine whether the organization is adopting and scaling the right digital capabilities at the right pace, investing in the right capabilities, and achieving the expected value from these investments.
Getting business owners involved in not only creating the business case for the transformation initiatives that will yield results in their parts of the business but also owning responsibility for their delivery is key, says Edwards, and this can make the shift easier.
David J. Castellani, senior vice president and business information officer for New York Life Insurance Company, leans heavily on hard business benefits to evaluate project priority, sequencing, and funding. Any business area that wants funding for a project must complete a detailed cost-benefit analysis and present this to a committee of business, finance, and technology leads. Those with the highest ROIs often go to the front of the line.
“Importantly, all funding is gated and as milestones are reached, additional funding is released or projects curtailed if benefit realization fails the test,” Castellani explains. “It is a discipline that works well for us, knowing that we do not operate in an unconstrained world.”
3 kinds of IT ROI metrics for the digital era
There are a number of potential measures of success for digital transformation initiatives. They tend to fall into three categories: strategic impact, operational impact, and cost impact – although some initiatives may yield results across categories.
1. Strategic impact metrics
Metrics that might be valuable here include:
· Revenue growth
· Lifetime customer value
· Customer acquisition costs
· Customer retention
· Time to market for new products or services
IoT analytics, or the co-creation of new digital products with customers or partners, might yield higher-than-typical revenue increases, for example, says Azim. Moves to common technology platforms across the enterprise, or efforts to achieve end-to-end visibility into a product or customer journey, on the other hand, may yield substantially higher incremental customer retention.
2. Operational impact metrics
Relevant metrics here might include:
· Productivity improvements
· Increase in scale
· Operational efficiencies
3. Cost impact metrics
Some metrics that fall into this category are:
· Business costs
· Total cost of ownership for business assets
· Total cost of ownership for IT assets
· Reduced IT operating costs
[ Read also: How to reduce technical debt: 5 tips. ]
How many IT ROI metrics do you need?
Paul Proctor, distinguished VP Analyst at Gartner, has said the best digital transformation metrics work as leading (not lagging) indicators, can be understood by those outside of IT, drive action, and have a clear and define causal impact on the business.
IT leaders who want to monitor the overall impact of digital and transformation over time should select just five to nine metrics to track, report, and act upon, Proctor advises.
[ How can open source principles help with your transformation? Get the ebook: Digital transformation, the open source way. ]