Digital transformation investments go beyond balance sheets

One of the biggest barriers when it comes to digital transformation (DX) is convincing C-suite management that it’s worth the investment — along with the disruptions that will inevitably result.

Every CEO and CFO wants assurances that any investment in new technologies and business models comes with a return on investment (ROI) that justifies the expense. DX is no exception but the catch is that the ROI for digital transformation is more complex to calculate — and harder to guarantee.

This is because every DX plan is unique to a particular company — what worked for one company isn’t necessarily going to work for your company. But it’s also because there’s far greater benefits from DX than simply projecting how much money you’ll make.

Digital transformation isn’t only about buying and installing new digital technologies and solutions — it also requires a fundamental restructure of business processes, paradigms and corporate culture to create an organization that is agile and flexible enough to compete in the increasingly digital world.

[Digital transformation] also requires a fundamental restructure of business processes, paradigms and corporate culture to create an organization that is agile and flexible enough to compete in the increasingly digital world.

And as we’ve discovered the hard way, it also gives organizations the agility to deal with socioeconomic disruptions such as, say, a global pandemic that results in urban lockdowns and suddenly remote (or unavailable) workforces.

So a more holistic view is required to understand the ROI of digital transformation.

It’s worth noting that the cost savings of DX alone can be worth the expense, even if no new revenues are generated. TM Forum’s Inform site is full of case studies from the telecoms sector testifying to this.

Canada’s TELUS recently deployed an open, transparent digital platform that included an ecosystem of tools, technologies and practices designed to simplify production paths, for example. According to Inform, TELUS said the new platform saved 134,000 hours of development and designer time in 2018 (which works out to around US$9.1 million in cost savings), while time to market increased 4x, and code-shipping costs were reduced from a multi-day human effort to a 12-minute script.

However, the DX payoff goes well beyond cost efficiencies. According to Analysys Mason, a central metric of DX — particularly for telecoms players — is the productivity gains resulting from the shift from physical assets to intellectual/digital assets. “Value-added per employee and value-added per employment cost should be increasingly important KPIs,” writes analyst Rupert Wood.

Also, during a recent online panel hosted by Alteryx, IDC’s Business Analytics research director Chandana Gopal pointed out that while DX initiatives need clearly defined goals to measure their success or failure, C-level managers should have an open mind on which metrics indicate success.

“When some people launch these projects, they think the goals or the metrics always have to be defined by dollars or ROI of some kind,” she said. “But often the benefits can be improving employee satisfaction, customer retention, sentiment or your NPS (Net Promoter Score).”

That said, even non-monetary metrics ultimately contribute to the bottom line at some point.

A 2019 digital transformation study from Deloitte concluded that companies that rate higher in digital maturity are more likely to report net revenue growth and net profit margins above the industry average. A follow-up study earlier this year affirmed that conclusion while offering some additional insights into how this works.

Put simply, financial metrics themselves don’t tell the whole story. The Deloitte report lists a number of DX benefits that contribute to ROI, and while revenue growth and increased efficiency are obvious (and the ones most likely of interest to shareholders), other benefits such as QoS, customer satisfaction and employee engagement also contribute to the financial boost digitally mature companies are experiencing.

Put simply, financial metrics themselves don’t tell the whole story.

Moreover, DX gives companies advantages beyond the usual business metrics. For example, in the last couple of years we’ve seen the trend of customers expecting companies to take corporate social responsibility more seriously and in more tangible ways in relation to things such as the UN’s Sustainable Development Goals (something the mobile industry, via the GSMA, has been pursuing for several years now). According to Deloitte, digitally mature companies are more likely to reap CSR benefits in part because they’re more likely to have modernized governance and ethics frameworks in place that enable them to respond quickly and flexibly to such issues and mitigate potential missteps.

At the end of the day, the paradigm shift of digital transformation includes radically shifting the way we think about measuring ROIs. To be sure, the bottom line is ultimately what matters, but C-level execs should always remember that the payoff of DX goes well beyond revenues, and even non-financial benefits will ultimately be reflected on the balance sheet.

Meanwhile, Paul Proctor, distinguished VP analyst at Gartner, offers some practical advice in setting KPIs for measuring DX progress: keep your KPI metrics simple, and create them in a business context that makes sense to executive decision makers. Otherwise, you’ll end up with metrics that are all over the map and don’t tell you anything useful.

“Choose KPIs that you can measure easily. Don’t try to build a KPI hierarchy. Select just 5 to 9 metrics to track, report and act on,” Proctor writes. “The value of a metric lies in its ability to influence business decision making.”