how to calculate ROI for digital transformation

How to Calculate ROI for Digital Transformation

  • Shoaib
  • Automation, Digital Transformation, Technology
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Like any other investment decision, investment in Digital Transformation has also to boil down to the ROI. So, how do you measure the ROI on this business life-changing move? Below, we will explain how to calculate ROI for digital transformation.

Return on investment (ROI) is a performance measure used to determine the profitability of an investment. The ROI calculation is given a;

 (Current Value of Investment – Cost of Investment) / Cost of Investment

The current value of the investment is obtained from the sale of the interest investment. ROI is often given as a percentage. However, how do we calculate the ROI for digital transformation?

With technology constantly changing, businesses find it hard to determine the return on investment in their digital transformation. According to International Data Corporation, global spending on digital transformation was predicted to reach $1.9 trillion as of 2019.

Measuring ROI is case-specific for different organizations and industries. The major challenge with calculating the ROI for digital transformation is determining the metrics that indicate poor or good returns on the investment.

How To Calculate ROI For Digital Transformation?

Here are some steps to help organizations calculate the ROI of their digital transformation.

Decide on the key motivation for digital transformation.

Too often, digital investments get defined as technology projects, and the digitization discussion focuses primarily on features and functionalities and not on the overall digital transformation goals. With this strategy, organizations fail to see the ROI tied to transformation.

It’s critical to focus on creating the right digital experiences — not just for customers but for employees so that they fully understand and are aligned with the customers’ experience and don’t simply fall back on the technology when interacting with them.

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Create is called “experience drops”: the capabilities and tools/information needed, at the right time, to have a tangible impact on customers’ decision-making process.

Choose a north-star metric that aligns with the key motivation

After defining what motivates the need for digital transformation, an organization requires a north-star metric that ties to an ROI.  To determine the primary metric, ask the following questions;

  1. What does success look like when you meet your objective?
  2. What do you need to track and analyze to gather the correct data?

When choosing the key metric that will show the success or failure of your digital transformation, anticipate unintended impacts that come with the switch.

Some of the ROI digital transformation metrics include;

  1. Process quality improvement
  2. Product quality improvement
  3. Increase in new customers
  4. Enhanced engineering productivity
  5. Increase in sales

Review the cost structure of the business

Investing in digital transformation requires capital. Depending on the functionalities of your business, it’s essential to review cost structures to determine where investment capital will come from;

Here are questions to answer;

  • Do you invest more or cut costs on any activities?
  • Which activities are not yet cost-effective?
  • Which activities are cost-effective?
  • Which adjustments in your current structure are needed to cut costs for digital transformation investments?

Establish the timeline to measure ROI

Whether progress is measured through soft or hard metrics, the goal of every digital transformation initiative should be to support the company’s overall strategic goals—also a detailed timeline for determining if the business is hitting the ROI north-star metric or not.

Constantly measure results against the ROI metric and adjust accordingly.

The rewards of completing a successful digital transformation will be great, but companies embarking on the process are well advised to expect a long, complex, and expensive process.

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Companies need an accurate picture of their progress by measuring ROI transformation at every step — in terms of what is working and what isn’t, how much time it’s taking, and whether it is boosting revenues and cutting costs.

The digital ROI framework can provide the holistic view companies need to ensure a fast, efficient, and orderly transformation while adhering to their strategic goals.

ROI Use cases for digital transformation

Establish a business use case

Establishing their ROI is easy when you already have products or services selling off the shelves like hot cupcakes. However, measuring the return on investment is not straightforward when embracing digital transformation.

In such a case, organizations can establish a future ROI projection. But, it is critical to maintain an enterprise-wide perspective on how each investment fits into the desired digital outcome.

Doing so allows the company to balance its digital investments across business units and strategic initiatives, plan for future investment needs and decide on the path forward.

Determine the technology that enables the use case

Which technology suite will increase the odds of a positive ROI in the digital investment? The answer is specific to an organization and the industry it operates in.

The challenge in picking which technology is cost-effective and needed, often time companies concentrate on optimizing their current processes in hopes of making them more effective, efficient, and engaging.

Instead, they need to balance the urge to perfect their current systems and processes with actively supporting innovative — even disruptive — ways to meet stakeholders’ rapidly changing digital needs.

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Wild west use case

In this case, where factors like being acquired or going public are front and center, the ROI for digital transformation is tied to these metrics. Traditional ROI, like profits and investment costs, has less impact when deciding which technology to invest in.

Key factors that affect ROI in digital transformation

Data-informed decisions

Customer data analytics is essential to obtain customer insights on the digital transformation you should implement. Data like purchasing history, community customer sentiments, feedback, and revenue are significant to analyze.

Track performance

Tracking your digital transformation efforts is critical in determining whether the investment is worthwhile. Your north-star metric dictates the tracking performance.

Digital Information Investment

Businesses need to work on digitizing business processes that can make customer experiences more engaging and improve workflow. Implementing new digital systems and tools must promote a digital culture in the workplace.

Exploring the need for customers

You can only know what pains your customers by interacting with them in their preferred communication channel. If it’s social media channels like TikTok or LinkedIn, be there.

Conclusion

Digital transformation in any business is a moving target, and so is customer experience. Before an organization invests, it must determine how to calculate ROI for digital transformation.

And because it’s not a shoe-fit-all scenario, each organization needs to focus on its stakeholders; employees, customers, & partners, and regularly interact with them to identify new opportunities and ideas through surveys, innovation challenges, and vendor partnerships; companies can gain an essential outside-in innovation pipeline.

Author: Shoaib
Shoaib Chaudhary is an entrepreneur and influencer with over two decades of experience in the technology industry. Shoaib founded Plumlogix with the help of the global 100 CIO, CTO, to empower businesses to eliminate today's barriers to efficiency, savings, growth, rich customer engagement, accountability, and data security. Before plumlogix, he built global businesses serving fortune 1000 companies, like Barns & Noble, Tenet Healthcare, Bloomberg, Sunnco, FannieMae, etc. Shoaib has been influencing global leaders to exceed organizational goals while advancing social responsibility. Shoaib also founded PlumlogixU.org for the advancement of in-demand digital skills globally.