Organizations around the world have invested millions of dollars on digital transformation initiatives. Yet, many IT leaders struggle to measure how well their companies’ digital investments are performing, and others see just a portion of the ROI picture because they only look at one or two parameters.
Here are Everest Group’s two key recommendations for how IT executives should measure digital transformation ROI.
Think and act like a mutual fund manager or venture capitalist
Mutual fund managers and venture capitalists view their investments through a portfolio lens. They look at the portfolio’s overall performance to understand how it is doing, recognize that underperformance of one stock or seed-stage company doesn’t signal overall failure, and make as needed adjustments to individual stocks or investments that are underperforming.
They also make sure their portfolios are comprised of investments with different risk profiles. This is because higher risk projects create the opportunity for higher returns, and deliver a lot of learning take-aways if they fail. Note that when it comes to measuring digital transformation ROI, IT executives need to look at overperformance as well as underperformance. If every project in the portfolio is deemed a success, the organization is likely not pushing the boundaries enough, isn’t innovating enough, and will likely only reap incremental benefits.
Define a clear set of business metrics before you measure
IT executives should define a clear set of business metrics for the digital transformation effort well in advance of the measurement initiative. The metrics should be rooted in a hypothesis about the various impacts the portfolio of projects will likely have on the business. While it can be difficult to link individual projects to outcomes, . Examples of hypotheses include:
- Meeting customer expectation – as customer experience a more digital world, their expectations of how to engage with the enterprise will change. An hypothesis that keeping up with the evolving customer expectations could be that it will increase customer retention and potentially new sales
- Breaking down the silos between IT and the business – secondments between IT and business units can increase and understanding of the links between IT initiatives and business objectives. An hypothesis could be that a greater understanding could enable faster innovation
Many IT executives err by focusing only on cost savings metrics. While the business case for technology projects must include cost savings, organizations that make strategic and operational impact their objective consistently achieve higher returns across all dimensions, including cost. In a recent Everest Group study on next-generation infrastructure, the 88% of the leading enterprises were able to achieve some level of reduction in operating costs from their infrastructure transformation efforts with 65% achieving reductions in excess of 10%. Only 29% of the rest of the study participants were able to achieve savings at that level.
Thus, IT executives should employ metrics that fall into three buckets. This ensures they are looking at the total value of the digital transformation initiative.
- Strategic impact: revenue growth, increasing lifetime value of the customer, reducing customer acquisition costs, accelerating time to market of new products, etc.
- Operational impact: productivity improvements, greater scale, operational efficiencies, etc.
- Cost impact: reduced IT operating costs, reduced business costs, reduced total cost of ownership of IT assets, etc.
Once the measurement effort is underway, IT executives should regularly – quarterly tends to work best – look at every project in the portfolio for signs that it is delivering the anticipated type of impact, or is instead contributing in an unintended manner. This gives them the opportunity to determine if adjustments need to be made to how the project is being executed, if business requirements have changed (e.g. shifting customer demands, new competitive threat, etc.), if they have gleaned sufficient learning from the project (e.g. process optimization, technical limitations, success requirements, etc.), or to terminate the project it if they conclude it will not deliver results.
Please reach out to me directly at [email protected] to discuss how to measure the ROI of your organization’s digital transformation initiatives.