Digital Transformation Conversations

Digital Transformation Conversations

Blind Faith: The Thorny Issue of Measuring Return on Digital Investments

For many organizations, digital investments are currently an act of faith. Even amongst digital leaders, only 56% of organizations create a business case, while only 34% assess digital initiatives using a set of common key performance indicators[i]. Over 78% of executives consider the inability to create a compelling business case on digital investments a critical issue[ii]. A significant 49% of organizations have not been able to show the impact of social media on their business[iii].  As one executive told us, “It is still difficult to compute ROI on many social media activities at least to the satisfaction of the executive board. [iv]

 

So, why is measuring digital investments such a challenge? First of all, digital technologies come with their own unique parameters. Traditional metrics tend to capture the short-term impact of well-understood technologies such as CRM. However, some of our newer digital technologies don’t fall neatly into a linear box. Take proving returns on social media initiatives. This is extremely challenging as you have to find a link between metrics such as revenue growth and customer sentiment. A recent survey of marketers drives this point home. Only 16% of marketers said they have been able to prove the quantitative impact of social media on their business. Even in the saturated mobile app segment, business cases are still at an evolving stage for most firms. In fact, Gartner predicts that throughout 2016, 75% of mobile apps are going to be developed without any business case[v]! Acts of faith are still the norm.

Another factor is the role of the CFO.  The CFO’s influence over technology investments has been steadily increasing – by as much as 44% between just 2010 and 2011[vi]. The issue here is that many CFOs will use their accepted and standardized financial metrics. And, unfortunately, these approaches are not always appropriate for measuring the impact of evolving digital technologies.
A final point simply concerns the difficulty of making investment decisions in the digital arena. Digital investments typically deal with emerging technologies that evolve rapidly and have an uncertain future. Take the case of Android – in as little as six years, Android has skyrocketed to seize a massive 79% of the Smartphone operating system market[vii]. Short tech-cycles make long-term decision-making a challenging endeavor, with many organizations ending up placing the wrong bet on potential technologies. It’s a fast-moving, uncertain world, where investment decision-making is simply difficult.

So, how can organizations move from leaps of faith to something more scientific?  A good start is to codify investments into three categories:  maintenance, transformative, and emerging technologies. This can give some clarity to the whole process.  

Maintenance investments keep the business running and/or minimize risk and include maintenance of websites and security/compliance-related projects. In such investments, traditional metrics such as conformance to budget, productivity and quality, and schedule should be used.

Transformative investments have the explicit mandate of supporting organization-wide digital transformation. These investments are cost-intensive with highly distributed benefits. For such investments, decisions need to be taken at the CEO level, along with central funding. Some examples of transformative investments include investments in core systems, platforms or services that enable advances in digital customer experience or operations.

Emerging digital technologies require an iterative approach to assessment – closer to that of a venture capitalist style. It is prudent to make small investments across a variety of ideas, allow these to rapidly iterate, identify the ones with potential and implement them through pilot versions. For instance, L’Oreal established an incubator called “The NEXT lab” to invest in latest digital technologies such as mobile e-commerce, location and retail[viii]. The risk with emerging technology investments is identifying the right time to evaluate ROI – too early-on can kill a good idea and too late can mean a sunken investment. Given the uncertain future of emerging technologies and their short shelf life, there are few industry benchmarks available for reference. But you should find those companies that have made similar investments and really try to understand the hidden costs and benefits. In some cases, there may be no clarity on ROI. In these cases, you could set the growth targets for the digital initiative and achieve them in a manner that covers initial CapEx and running OpEx.

Instinct and intuition clearly have their place in the world of business, and it’s certain that they currently have a place in the digital investment arena. But there are some steps organizations can take to make this process more of a science than an art; to introduce some discipline to balance the acts of faith. If you would like to look deeper into this issue, read our report at: Measure for Measure: The Difficult Art of Quantifying Return on Digital Investments.



[i] Capgemini Consulting and MIT Center for Digital Business, The Digital Advantage: How digital leaders outperform their peers in every industry, 2012

[ii] Capgemini Consulting and MIT Sloan Management Review, “Embracing Digital Technology: A New Strategic Imperative”, 2013

[iii] CMO Survey, “Highlights and Insights”, February 2014

[iv] Capgemini Consulting and MIT Sloan Management Review, “Embracing Digital Technology: A New Strategic Imperative”, 2013

[v] Gartner report, “How to Estimate ROI for Customer-Facing Mobile Apps”, January 2013

[vi] Gartner, “Survey Analysis: CFOs’ Top Imperatives from the 2013 Gartner FEI CFO Technology Study”, May 2013

[vii] Strategy Analytics, “Android Captured 79% Share of Global Smartphone Shipments in 2013”, January 2014

[viii] L’Oreal, “Women in Digital”, company website


About the author

Subrahmanyam KVJ
Subrahmanyam KVJ
Subrahmanyam KVJ is Manager of Capgemini Consulting’s Digital Transformation Research Institute.

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