Owing to the various service interruptions companies were forced to face during the onset of the pandemic, businesses were quick to adopt digital transformation to improve and sustain their processes in the long run.
As per Grand View Research, the market size for global digital transformation is expected to grow at a compound annual growth rate (CAGR) of 23% until 2030. And this is a major milestone for businesses that foresaw the rewarding characteristics of transforming their processes or technologies.
But is having a good digital transformation and execution strategy the only indicator of success? Certainly not. Companies need to constantly review digital transformation KPIs – Key Performance Indicators, aka metrics, to track, measure, and predict growth. They need to continually measure the Return on Investment (ROI) to see if the transformation initiatives are supporting the larger business goals.
Let’s take a look at how to measure digital transformation using ROI and what it indicates for businesses.
What does ROI mean in digital transformation?
ROI is typically used to evaluate the return of expenditure or to indicate the profit made on the initial investment and in this case – digital transformation. ROI is a super useful KPI that every business, both big and small, needs to implement as it helps make better business decisions in the long run while ensuring success.
And digital transformation ROI can help businesses analyze what works and what doesn’t, especially in terms of technology. Here, we compare the expenses made on implementing new technology or services with the benefits this digital transformation investment resulted in. Further, ROI also provides clarity over which areas in the business require additional improvements to benefit the most from the digital transformation strategy.
Digital transformation ROI can be calculated using the net cost savings, profits made, and other gains versus the implementation cost of the digital solution.
Here is the simpler version of the formula famously used to calculate the ROI:
ROI= (Revenue from investment – Investment cost) / Investment cost
Ways to ensure digital transformation ROI
Here are five things to ensure that your business is deriving the maximum ROI. These will also help you identify your future goals in transforming your processes.
#1. Establish a digital transformation goal
To get the right targeted ROI, companies need to set a clear-cut goal for the digital transformation initiative. This goal needs to define the intent behind the initiative, like improving customer experience, increasing conversions, or expanding operations to name a few. Once defined, businesses need to be specific on the problem that the set goal solves. This could be increased employee productivity, system efficiency, or better profits.
#2. Determine overall business expenses and budgets
Once the goal has been defined, businesses need a well-articulated estimate of the expenditures that will incur while implementing the digital solution. And not just expenses, businesses need to review their activities and processes to separate the ones which are cost-effective from the ones that are mostly not.
Apart from technology, there could be several other expenses such as employee training, software purchases, maintenance costs, and more. The stakeholders need to define the based budgets based on the above estimates so that it is well-aligned with the digital transformation goal defined in step 1.
#3. Quantifiable metrics for the right ROI
By putting a quantifiable metric as the outcome of the digital transformation goal, businesses would have a handy measurable objective. This will in turn clearly define if the outcome was a success or not.
For example, company A is currently taking 50 hours of manual effort a week to perform a repetitive support task. Post implementing a transformational tool, the company needs to target the manual effort reduction by 80% or 10 hours per week. Defining such quantifiable metrics aid in obtaining a higher ROI as they form clear indicators of success along the digital journey.
#4. Set a timeframe to measure ROI
Businesses need to assign predefined time frames within which the ROI would be calculated. This timeframe could fall within a specific month, year, quarter, or as per the solution’s execution date.
Setting such timelines leads to a better assessment of the solution’s efforts, its effectiveness, and a more accurate ROI. The digital transformation planned for the business may have various components under its hood. Thus, to accurately measure ROI, each component needs to be sequentially measured in their respective completion timelines.
#5. Continuously track performance and ROI
Digital transformation is indeed a journey and not a destination. That being said, it’s prone to constant changes with the perpetually evolving technologies and digital trends. So, measuring a business’s performance using ROI within just a selected time frame is pointless.
Businesses need to form a routine where the ROI is calculated continuously within agreed-on timelines. Furthermore, these outcomes can be compared alongside each other which accounts for evidence of the initiative’s efforts. Upon comparison, businesses will have a clear idea of whether the set objective is indeed attained through a successful transformation solution or if any more technology changes would help them get to the goal of obtaining a higher ROI.
The Bottom Line
Organizations need to have a systematic approach in place to measure, analyze, and innovate through digital transformation solutions. The ability to measure efforts pushes the organizations to implement more and more digital changes resulting in consistent growth and gaining an upper hand over their competitors.
A good digital transformation solution analyzes the problems the business is facing and helps create a clear strategy that in turn fast-tracks its journey to achieving the desired ROI.
At Heptagon, we help fulfill exactly this and more.