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ROI of Digital Transformation: Balancing Long-Term Vision and Short-term Impact

This Article by Seth Earley was originally published on CustomerThink.

Nowhere is the case for metrics stronger than in digital transformations. The most sweeping and comprehensive transformations are the most effective, but the fact that they take place over years and not months means that the full effect is not felt for a long time. Yet the pressures are constant to show ROI for the investments within budget cycles. The key to maintaining support for these initiatives is to link them to improvements in process and outcomes from the very beginning. Short-term wins can then be put into the context of long-term goals, thereby sustaining momentum. Defining what those wins are and providing convincing measurements is essential in launching and maintaining digital transformations.

Insights from Three Decades of Digital Transformations

I have been working with enterprises for almost three decades. Over the years, I have seen the results of numerous decisions and investments over timelines that are appropriate for transformations of global enterprises; i.e., three to five years, as opposed to three to five quarters. Too often, leaders are measured by the marketplace based on quarterly or annual reports. But true effectiveness of leadership requires a different scale. Many organizations have made trade-offs to satisfy short term performance while neglecting longer-term investment in innovation or the foundational capabilities that were required for innovation[1]. Some did not see a future in which survival was dependent upon transformation, and others attempted transformation but did not succeed.

Research by consulting firm McKinsey has shown that long-term oriented enterprises performed better than short-term-focused enterprises, but frequently the CEO responsible for that longer-term perspective was not rewarded by the marketplace[2]. The companies performed better on multiple dimensions and stockholders were rewarded, but because the timeframe was longer than executive tenure, unfortunately, results were part of their legacy rather than their compensation. Incentives are more typically aligned with marketplace demands for fast, short-term results. 

Short-Term Incentives for Long Term Initiatives

“Top executives today are feeling squeezed by activist hedge funds and institutional investors who are constantly pressuring them to boost quarterly earnings, increase dividends, and buy back shares—all at the expense of future growth.” (From Go Long: Why Long-Term Thinking is Your Best Short-Term Strategy[3].)

Consider the impact of these pressures on digital transformation initiatives. To begin with, according to research from KPMG, McKinsey, and Everest Group, most transformations either fail or do not produce expected results.[4] There are many reasons and factors, however they all boil down to this: Transformation is hard. Really, really hard.

OK, perhaps we can be a bit more specific about what causes failure: Lack of a clear vision. Insufficient buy-in, socialization, or change management. Stakeholder fatigue. Insufficient investment. Focus on completing the project rather than on impacting the customer. Lack of enabling processes. Taking a fragmented approach. Incorrect or outdated technology infrastructure. Inability to adapt and evolve the plan. The list goes on.

Let’s first take a look at the impact of the pressure for short-term results, how this pressure exacerbates the already challenging landscape of digital transformation, and what to do about it:

Vision – Transformations take years. The vision for long-term change needs to be balanced with the realities of day-to-day demands on operations. Leadership needs to break the vision of a future state into projects and processes that are understandable at various levels of the organization.

Buy-in and socialization – Breaking the transformation into tangible projects and programs help employees to understand what the initiative means to them and their jobs, the “What’s in it for me?” or “How does this impact me?” question has to be answered to get support at all levels.

Fatigue – Many organizations are continually undergoing various transformations, which inevitably leads to stakeholder fatigue[5]. Building in short-term wins and communicating visible progress will help reduce fatigue.

Investment – Transformations have hidden costs, and the journey requires flexibility to deal with surprises and new findings.

Completing the project versus impact – Success is too often measured by project completion rather than by true impact. Budget and time pressures lead to a false sense of success. The boxes are checked but the results are not meaningful. It is important to have metrics that show what the project has accomplished on the way to the bigger picture end state.

Enabling processes – New ways of doing business require that supporting processes have a level of maturity appropriate for the process. Maturity takes time to develop throughout the organization, so developing a realistic digital transformation roadmap accounts for current state maturity across multiple dimensions.

Fragmentation – Breaking a large transformation into multiple projects can result in disconnected efforts and lead to lower levels of efficiency or a bumpier customer experience. The roadmap elements have to be carefully coordinated to support the overall vision. Cross program communications need to be part of the plan.

Legacy infrastructure – Legacy systems can impact the ability to execute on transformations. The limitations of infrastructure need to be understood at the start and if necessary, the hard choices to rip and replace have to be part of the program.

The danger of ignoring the mandate for digital transformation

Why are digital transformations so vital? In a study conducted by IMD and Cisco[6] digital disruption is “the effect of digital technologies and business models on a company’s current value proposition, and its resulting market position.” The conclusion in the study is that companies can either disrupt themselves, or risk being displaced by new business models that capture their previous customers.

This phenomenon is not just being seen in high tech, but across industries such as hospitality, with companies such as Airbnb. And despite the belief by executives that 4 in 10 market-leading companies across multiple industry sectors will be displaced by digital disruption over the next five years, 45% say this issue is not a board-level concern. In short, despite an existential threat, many organizations are not taking the action they need to ensure their own survival.

Here are a couple of anecdotes from actual client engagements that compare the different outcomes of two companies that made different choices. 

K-12 Publisher

A textbook publisher for the kindergarten through twelfth-grade education market found that their competitors were beating them to market by several months. Since textbooks (even with state standards) are highly customized to regional needs but reuse existing content, the competitor created a repository containing over 1 million pieces of content that were structured in such a way that an editor could input grade level, subject, objectives, and other parameters and very quickly have a rough draft of a book. This removed an enormous amount of manual work and enabled the reuse of previously published materials. 

The CEO was flabbergasted that his company did not have the same capability. Upon further investigation, it was learned that a project such as this was deprioritized in each of the prior three years. When the team was asked how long it would now take to achieve parity, they responded with 2 – 3 years based on the advances that the other organization had made. (And of course, will continue to make). It turned out to be too late. The publisher had lost so much ground that they were unable to catch up and the market segment was lost. 

Hi Tech Manufacturer

A large global manufacturer invested in information architecture, taxonomy, and content standards back in 2008. (My firm consulted with them and provided the roadmap and foundational methodologies and deliverables). The long-range vision was to create content in one location and then syndicate it to distributors, the customer service call center, field service, customer self-service, channel partners, and the marketing organization. This required a large investment in infrastructure (on the order of magnitude of tens of millions of dollars) and the development of maturity in multiple areas of supporting processes. 

The result has been savings in the hundreds of millions of dollars in support costs and internal publishing processes, increased channel partner revenue, and improved customer experience. When published, content is available instantly through all downstream access points, including being embedded in the products themselves. This plan required that leadership maintain the vision over a decade and make significant investments over that timeline. The program leader recently shared with me that the industry is a decade behind. “I’m counting on the fact that my competitors have not made these investments and will be years behind us while we continue to build. There’s no way they will catch up.” 

The execs at the organizations that did not make the financial commitment were smart people. What caused them to make that decision? In some cases, it is a simple as being burned in the past by big projects that promised big returns. Or in a data project that did not provide business value after significant time, money and effort. (Many “master data” initiatives suffer from this fate). In each situation, it is based on a lack of understanding or belief in the relationship between a particular project and the capability it is expected to support or enable.

Integrating the digital transformation process

Leadership is faced with making decisions within the short-term constraints of marketplace pressures. It’s not clear when these decisions will pay off, because of the complexity of organizational processes and because linkages are not well understood. Not having an integrated approach that defines how a portfolio of programs (along with their enablers) contributes to a better customer experience, will lead to program failures and missed opportunities. According to research by KPMG, “Lack of coordination results in redundant expenditures [and] data fragmentation and leaves the anticipated value of digital investments under realized”[7] The problem is defining the boundaries of “an integrated approach” that does not result in overly broad scope and overly ambitious objectives.

One approach is to connect investments to the impact on the customer journey and related processes. Using the customer journey as a way to organize and coordinate transformation efforts helps to balance short-term objectives and goals with a longer-term vision. If the initiative supports a customer journey stage directly — or supports someone who enables that stage — then we can capture a baseline metric (or build the instrumentation to do so to track effectiveness of the process) and show specific impact. The key is to understand correlation or causation. Our work suggests that improved data fill on an e-commerce website will correlate to increased conversion and revenue. An investment can be extrapolated to project the revenue impact of such a project. 

As shown in the figure below, the customer journey begins with the customer learning about the product or service they are seeking, and on to purchasing, receiving, using, and then getting support as needed. At each stage, a variety of enabling technologies can be used to assist. Each stage is also associated with a different department (though there are overlapping processes between departments), and each department has process metrics that it is responsible for meeting. (If those are not defined, they need to be early on.)

This framework can be used to identify bottlenecks in the customer journey and target the technologies that would provide the greatest leverage at that particular time. Part of the assessment is how well existing technologies are deployed, including data quality and supporting processes.

Given that not everything can be done simultaneously, prioritizing the work where it is most needed will help with buy-in. Or the organization can look at what technologies can be used most broadly; for example, bots can be used in every step of the journey. Focusing efforts on developing a suite of “helper bots” to support the customer journey might be a good way to leverage finite IT resources. Each of these would be designed with a specific process in mind with measurements of baselines and an ROI calculated based on the impact to that process.

Connecting tactical metrics to strategic outcomes

One of the challenges in digital transformation is demonstrating to stakeholders how tactical projects support strategic objectives. The figure below shows how improvement in data (content, information architecture, taxonomy, and search, for example) can be measured and linked to strategic objectives. Leadership would like to understand the ROI of a data investment. The key is to show the linkage- data supports a process, processes enable business outcomes and business outcomes support the organizational strategy. 

Data quality can be measured in many ways, and therefore progress can be measured through completeness, alignment with process, heuristics (best practices), and other dimensions. Similarly, process efficiency and effectiveness can be measured. These all lead to meeting business unit objectives, which support enterprise-level performance, i.e., increased market share, revenue uplift, customer satisfaction, reduced costs, etc.

The role of maturity in success

Digital transformation depends on an organization’s having a certain levels of maturity in several dimensions, including data, content, customer information, product information, and knowledge capability. For example, processes cannot be automated if the supporting data is not well managed. We have designated five levels of maturity for each of the dimensions. For content, these are:

  1. Unpredictable: Characterized by inconsistent data, static architecture, minimal user expertise,
  2. Aware: Activities are stable but siloed, somewhat harmonized technologies, and early adopter proficiency.
  3. Competent: Comprehensive lifecycle management of data, rules-based tagging, governance with assigned responsibilities.
  4. Synchronized: Adaptive repurposing of content, modeling of content for some customer groups, cross-team collaboration.
  5. Orchestrated: Personalization of content, high fidelity content modeling, automated workflows, and syndication to downstream internal and external systems.

Levels of maturity can be assessed by organizations for the other dimensions, with different descriptions applying to each level that are appropriate for each dimension. The maturity levels are a determining factor in achieving positive outcomes of digital transformation.

Differing outcomes can be seen even within a single company. A manufacturing conglomerate that made a long-term commitment to investment in foundational data and data architecture spent millions on getting their product information cleaned, well-architected, and integrated with the customer engagement ecosystem using a product information management system. This was done at the corporate level as an infrastructure project that would enable the various business units. However, the business units were allowed to onboard their products and processes based on the needs of their businesses and tended to proceed at varying rates. 

The delta between business units that bit the bullet and made the expenditures versus those that delayed or did not resource the capability sufficiently was dramatic. One business unit saw net new annual revenue of $400 million and reduced support costs of approximately $100 million. Others were not able to show any improvement from their transformation efforts, in part because they did not staff the program adequately or spend on the needed resources.

Digital transformations are data transformations. Too often they are attempted without a detailed understanding of dependencies including data flows and integrations, supporting processes, ownership, and upstream and downstream information sources and uses. 

No large enterprise of any complexity can have a detailed understanding of all of these issues at the start of the transformation. The challenge is that critical dependencies can be revealed that can sink a program due to the extent of the underlying issues. Rather than stepping back and addressing these issues in a sustainable way, many organizations attempt to kick the data and process issues down the road. Without the investments in foundational things that are not sexy or exciting (data, process, governance), transformations will not meet expectations. 

Get the foundation right and you will significantly improve your odds of success. 

Notes:

[1] 50 Examples of Corporations that Failed to Innovate

[2] How new CEOs can manage for the future

[3] Cited in Go Long: Why Long-Term Thinking is Your Best Short-Term Strategy

[4] Relentless digital transformation can seem overwhelming, but we believe it can revolutionize your business

[5] Why digital transformations fail: 3 exhausting reasons

[6] Digital Vortex: How Digital Disruption Is Redefining Industries. Global Center for Digital Business Transformation, an IMD and Cisco Initiative. 2015.

[7] Who or what is driving digital transformation at your organization?

 

Earley Information Science Team
Earley Information Science Team
We're passionate about enterprise data and love discussing industry knowledge, best practices, and insights. We look forward to hearing from you! Comment below to join the conversation.

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