You might need to throw away the business case for truly transformative digital projects, says Capgemini
If you are embarking upon a truly transformative digital project, you might need to ditch the idea of a formal business case altogether. Meanwhile, tactical investments in emerging technology might be better considered as venture capital investments than traditional OpEx or CapEx projects. But tell your CFO to relax — the three quarters of technology projects that are basically Business as Usual (BAU) can still happily be assessed along traditional lines.
These are three key finding from a new report by Capgemini called “Measure for measure: the difficult art of quantifying a return on digital investment”.
According to the paper — authored by Mathieu Colas, Jerome Buvat, Subrahmanyam KVJ and Swati Nigam &mdash the issue of measuring digital ROI Is proving to be an insurmountable problem for many organisations. “What do you do when you are convinced of the merits of an investment based on your gut feeling, but you cannot create a compelling ROI-driven business case?” It turns out that the answer involves stepping outside the usual management comfort zone, with evidence suggesting that close to half of digital transformation leaders (Capgemini calls them the Digerati) do not create a business case.
A big part of the problem is that measuring any digital impact is difficult where organisational silos exist, or in the presence of legacy power structures. “Organisations need to have a firm-wide view to be able to assess these investments,” say the authors. “Our research with the MIT Sloan Management Review found that only 19 per cent of companies have cross-functional steering committees that manage and foster digital investments at a corporate level.”
Indeed the language out of Capgemini is surprisingly blunt when it comes to digital transformation. “[In] such cases, drawing up a business case is not necessary. In fact, it even might be waste of time. This is why decisions for such investments should be taken at the top, usually by the CEO, and should be funded centrally. Investing in core systems, platforms or services that enable advances in digital customer experience or operations are examples of transformative investments.”
For tactical investments in emerging technology, the authors recommend adopting an approach that is familiar to venture capitalists the world over. “The idea would be to make small investments in a variety of ideas, allow them to rapidly iterate, identify those with potential and shut down others.”
And they suggest that when there is a complete lack of clarity of ROI, executives should simply let the investment pay for itself. “There will still be instances where executives are faced with no clear business case/ROI for a digital investment. However, that should not be a cause for worry. Organisations should strive to get the incremental revenues to fund the digital initiative. The growth targets for the digital initiative should be set, and achieved, in a manner that covers not only its initial CapEx, but also its running OpEx.”
Of course, that is asking for a leap of faith — especially from CFOs — many of whom find even the idea of square pegs in square holes unacceptably risky. The paper acknowledges that, in many organisations today, the CFO is the top technology decision-maker — but their the use of familiar finance tools like ROI runs the risk of missing the full value of digital investments.
And it is an issue not simply restricted to the bean counters. “The language of digital is typically alien to C-Suite leadership. CxOs understand the language of costs, revenues and resources. Most digital technologies come with their own vocabulary, which is in itself quite different from traditional technology.”
The paper also spends some time examining how decisions can be made around digital investments. The bottom line: strong corporate governance — lead from the top. “To coordinate properly, firms should create a centralised digital steering committee that aligns around the company vision and evaluates and funds digital initiatives centrally. Such committees also make investment decisions that might not be feasible for a single business unit to undertake.”
Capgemini says these steering committees should be allotted the task of prioritising and funding digital initiatives, and that these need to be made up of senior executives from marketing, technology and product. And, critically, they should report to the CEO “Looking at an investment proposal on a standalone basis is not sufficient; decision-makers must look across the overall investment portfolio in business as usual (BAU), transformative and emerging technology projects.”
The authors say it is important to balance out risks and short- and long-term payoff as this ensures that funding is given to the right type of investments.
The report also provides a simple toolkit for determining whether you are ready for a digital investment by asking four questions:
- How well do you understand your digital investments;
- Where do you see digital investments contributing in your overall investment mix;
- What is your approach to investing in digital initiatives;
- Do you have the right governance structure for administering digital investments.
“As more organisations embark on their digital transformation, it will increasingly become imperative to define and measure digital initiatives. Nevertheless, the lack of a well-defined measurement methodology should by no means be a stumbling block to funding digital initiatives. As technology matures, leaders can start expecting to see more refined ways of measuring digital investments.”
Until then, say the authors, “We might need to rely on that strong gut instinct and take a leap of faith.”