Measuring the return on digital transformation investments is a tricky business. Digital change transcends functional and business boundaries, from how a company goes to market, to the ways it operates, to how it interacts with customers or even its own employees. While some individual initiatives may have a definitive and short-term payoff, others may only cost money in the short term in the service of potential long-term business value.
What’s more, digital transformation efforts are ongoing and evolving, which can render traditional business value calculations and financial governance approaches less effective.
Still, quantifying and qualifying the impact of this growing category of strategic spend is essential to managing and measuring the return on digital innovation. “Just implementing the technology isn’t enough – the technology needs to be specifically tied to monitoring key performance indicators on customer insights and business process effectiveness,” says Brian Caplan, director with management consultancy Pace Harmon.
[ CEOs are asking more questions about digital transformation ROI. Read our related article: Digital transformation reality check: 10 trends. ]
Now that we’re several years into digital transformation, some best practices are emerging for developing digital transformation metrics that are tied to overall business strategy and performing regular checks on those key performance indicators.
Digital transformation ROI: Are you taking enough risks?
“When determining how well digital transformation investments are performing, it’s best to take a portfolio view and not a project level view,” says Cecilia Edwards, partner with digital transformation consultancy and research firm Everest Group. Just as a mutual fund manager or venture capital firm would look at overall performance to determine how well things are going, digital transformation leaders must take a holistic view of digital change efforts.
This is particularly important so that the underperformance of one particular project doesn’t reflect negatively on the overarching efforts of IT. It also builds tolerance for the necessary risks that must be undertaken to achieve real digital transformation.
“The portfolio is comprised of investments with different risk profiles because higher risk projects create the opportunity for higher returns,” Edwards explains. “If every project of the digital transformation initiative is successful, then the organization is likely not pushing the boundaries enough, not very innovative, and is likely only making incremental changes."
"Some of the projects need to be very high risk. If they fail, there is great learning that can be applied,” says Edwards. Ultimately, however, the entire effort should result in a positive financial impact over time.
Once you're ready to do an investment check, consider these best practices:
Makes no sense to talk about "digital transformation" these days. Wake up, it was over years ago. Digital is like the air we breathe. Let's start talking about business transformation because every CEO I know is doing this.