Visit Fortune, Bloomberg or the Harvard Business Review and you’re seeing them: headlines about digital transformation. Don’t be tricked into thinking this is another buzzword – it’s not. Digital transformation is the top strategic priority for half of executives globally in 2017.
What exactly does digital transformation mean? Ray Wang, principal analyst and founder at Silicon Valley-based firm Constellation Research Inc., defines the term as “the methodology in which organizations transform and create new business models and culture with digital technologies.” We sat down with Ray to discuss how today’s leaders can create a successful digital transformation. This is the fourth post in a six-part series.
Any organization with hopes of growing (or even doing business) in the future must adopt new tools, platforms and processes to thrive in the ever-changing world of technology. Digital transformation is happening in every industry, at every level of government and in academia far faster than most experts predicted.
You know you can’t afford to put off digital transformation, but what will the investment cost you?
The truth is successful transformations often come with some significant expenses. Leaders find themselves purchasing new hardware and software and investing in highly paid employees with skills to leverage existing and new technologies.
In 2017 alone, companies around the world will spend more than $1.2 trillion on digital transformation—18% more than they spent last year. And the investment is expected to increase, reaching $2 trillion over the next three years.
These costs can be hard to justify if stakeholders see digital transformation as a one-time bet on rebuilding existing businesses, rather than a process for developing new products and strategies that allow an organization to compete in the future.
The ROI of digital transformation isn’t traditional
Most business investments are measured using some combination of payback period, internal rate of return (IRR), or break-even analysis. Accountants project the gain from investment and divide that by the cost of the investment. By these measures, digital transformation might appear to be a bad investment, especially when compared to other opportunities a company might consider.
For example, investing one million dollars to digitize an aging inventory management technology may have a significantly lower short-term return on investment than spending the same million dollars on new product development or even a new marketing campaign to drive an immediate increase in sales. But relying on aging systems to support the business activities of the future is a losing strategy. Eventually the lack of digital investment will catch up with (and possibly destroy) an organization.
How pricey changes translate to savings
The reality is the investment in digital transformation will actually save your company money. Even if traditional ROI projections don’t look stellar.
Once an organization’s processes have been digitized, the transformation and cost savings continue as teams work together to improve processes and technology—removing inefficiencies and automating steps in the process that require expensive and time consuming analog inputs from employees and suppliers.
Capital expenses are often reduced and move to the operating budget as organizations move more data and services to the cloud.
In addition, digital transformation changes the way an organization goes from idea to the market place. New tools speed up innovation, reducing design cycles and development time. These tools allow you to understand customer needs better than ever (in some cases, better than customers understand their own needs). Often, the new digital platforms you’re building encourage customer engagement and increase lifetime loyalty.
Digital transformation also makes it easier to build new feedback loops across the organization, providing access to new data sets—chats, video, social media, online discussions, point-of-sale transactions—that can be mined for insights to improve products and processes. This allows employees to identify revenue opportunities and new ways to do tasks more efficiently.
These are all very real potential gains that are difficult to capture in traditional measurements of ROI.
The wrong skillsets are the greatest risk to your investment
The irony of digital transformation is that the implementation of platforms, software and systems is relatively easy compared to finding talent with the right skill sets to manage it all. You can no longer get away with easily hiring the right person when the need arises—a process that can take months and cost thousands of dollars. Imagine the cost and hassle if you need to bring on a whole team of experts.
In addition to new business strategies, digital transformation requires a shift in talent strategy as well. Rather than hiring for exclusively for needed skills, leaders should hire people with an aptitude for learning, so as technology needs change, skills can be quickly updated to support new software and platforms. The ability to learn new skills on the fly is becoming far more important than a command of any one set of technical skills.
As organizations invest in new software and platforms, it’s critical to also develop learning systems that enable employees to skill up on these tools. Lack of access to “self service” learning platforms is an enormous barrier to executing successful digital transformation. Providing these kinds of tools will put you in a better position to leverage the new technology entering your organization.
So what’s the ROI of your digital transformation? If these changes allow your organization to develop competitive products and services that customers will buy in the future, the return on investment just might be priceless.
Hear more advice from Ray Wang about successfully navigating digital transformation on YouTube.