Digital transformation unlocks a wealth of benefits, but it also costs the moon.

C-suite executives do not loosen their purse strings unless they see tangible benefits for the investment. This is more so in today’s highly competitive business environment, where each penny spent requires justification for the opportunity cost. 

Many enterprises struggle to make effective business decisions owing to opacity in vision. They cannot undertake comparative analytics or gain visibility into the effectiveness of digital transformation. They fail to make the right digital moves at the right time and miss opportunities. They lag behind industry leaders in providing cutting edge tools for their employees, or the benefits of the latest technology for their customers.

The solution lies in measuring the Return on Investment (ROI) of the digital investment. But measuring the ROI of IT investments has always been difficult. It is even more difficult to measure the ROI of digital transformation. IT ROI is no longer a straightforward case of calculating the returns of a specific investment over some time. The success of digital transformation depends on factors such as speed to market, extending the shelf life of a product, converting Capex to Opex costs, the social optics of an investment, and other factors. Considering all these factors, many of which are indirect, complicate the IT ROI matrix.

Operational Impact Metrics

Operational impact metrics are traditional straightforward metrics such as productivity improvements, an increase in operational efficiencies, and more. Newer metrics such as the impact on productivity through Robotic Process Automation (RPA), Artificial Intelligence-powered chatbots and cloud migrations allow IT managers to quantify the returns out of investments in emerging technology. 

The actual returns go much beyond what these traditional metrics capture though. For instance, a chatbot delivering prompt and fulfilling customer engagement may lead to positive word of mouth referral, which in turn might lead to a new customer. The operational metric does not relate the new customer to the chatbot. 

Cost Impact Metrics

Cost impact metrics, another category of traditional and straightforward metrics, capture the financial implications of a new IT investment. These metrics help decision-makers identify if the investment in these technologies is worth the savings. In other words, it identifies the opportunity cost of IT investments.

Finance managers go by well-defined guidelines regarding ROI. They establish yardsticks such as the number of months within which a new business investment has to deliver a positive return and the minimum ROI. They do not make the investments if the projections do not meet these yardsticks.  

Popular metrics in this category include the total cost of ownership and reduction in operating cost due to the new IT system. Automation, IoT and cloud adoption reduce operational expenses significantly, and the cost impact metrics allow quantifying such reduction. 

Strategic Impact Metrics to Measure IT ROI

Traditional IT metrics focus on efficiencies and cost reduction. Emerging technologies and digital transformation integrate IT to core operations and enterprise strategy. The returns of such IT investment go much beyond efficiencies and cost. IT becomes the source of competitive advantage, delivering differentiated customer experience, and having a significant impact on revenues.

Strategic impact metrics measure the impact of IT intervention on the core health of the business. It compares the amount of investment vis-a-vis the increase in revenue growth, increase in lifetime customer value, decrease in customer acquisition costs, increased customer retention rates, and accelerated time to market for new products or services.  Also, when the company plans to go public or positions itself to be acquired, increasing gross revenue and year-over-year growth numbers matter more than ROI.

The digital transformation thus forces a relook on traditional models. For instance, the minimum ROI yardstick becomes elastic when the objective is accelerated time to market. If the business case of the investment rests on capturing the market before the competitor does, insistence on a minimum ROI within the predetermined term is meaningless. Many-a-times, businesses pay a high cost for a platform to access new technology, new market, or for business agility.

Success depends on identifying an effective linkage between a metric and the IT intervention. For instance, efforts to achieve end-to-end visibility into a product or customer journey may yield substantially higher incremental customer retention. Co-creation of new digital products with customers or partners might yield higher-than-typical revenue increases.   

There is a great level of ad-hocism inherent in the process, to identify any distorting or intervening factor which may have caused an increase or decrease in the metric, despite the IT intervention.

 The onus is on the CIO to make a detailed cost-benefit analysis of the IT investment, factoring in both direct and indirect benefits. The traditional stumbling block to measure IT ROI has been the indirect nature of IT benefits. The fruits of the investment in IT often manifest elsewhere and that too in the long run. The onus is on CIOs to identify such indirect benefits and convince the decision-makers. They need to develop a business case that convinces finance planners to extend the time to positive return and/or reduce the minimum acceptable ROI within such time. 

A study by ISG reveals 88% of large global enterprises having some digital transformation initiatives underway. The total worth of such ongoing projects exceeds $2 trillion. But only 16% of such initiatives thrive, and a whopping 40% is abandoned at some point. Measuring the effectiveness and impact of IT ROI has never been more important. 

More and more CEOs hold IT leaders accountable for business results. There is no standard set of universally applicable desirable or effective metrics. Any metrics that help decision-makers and strategists capture the value of IT investments is invaluable. The onus is on CIOs and IT managers to identify the relevant metrics which would quantify their IT initiatives, and prove their worth in the enterprise.