It is clear that incentives are the shaping force underlying human action. In the corporate world, the way success is measured in an organisation drives the behaviour of the employees. So it shouldn’t come as a surprise for business leaders to see that if they use outdated key performance indicators (KPIs) to measure new digital approaches, people will revert to traditional practices. Therefore, alignment between digital strategy and metrics is a determining factor in translating the digital vision into reality.
What do digital transformation and marshmallows have in common?
Digital transformation is a multi-year effort, and the return on investment is not always immediate. Therefore, it requires a long-term investment approach. An interesting analogy to illustrate this is the Stanford Marshmallow Experiment. In this study, a group of children were left alone in a room with their favourite treat (i.e., a marshmallow) in front of them. The kids were given two options: They could either eat one marshmallow immediately or wait for 15 long minutes to get two marshmallows. The outcome of the experiment showed that children who decided to wait longer had a tendency to have better life outcomes.
This reflects the longer-term thinking and patience required for digital transformation financial road maps. However, investors still require a clear view of progress along the journey and the expected financial outcomes.
If an organisation uses traditional metrics to communicate its digital progress to investors and the board of directors, it will struggle to demonstrate the financial value of digital. The traditional metrics such as income statement balance sheets focus only on the past success, while the digital metrics and KPIs try to ensure the company will be competitive today and in the future. Therefore, it will be challenging to justify additional capital investments to support new digital initiatives. To generate a successful digital transformation, it is vital to create a new set of KPIs that capture the digital improvement along the transformation journey and then communicate those KPIs effectively to employees, investors and partners.
How to craft a scorecard for the digital age
The new set of KPIs should provide a view of success across three critical areas: financial, business and operational. In parallel they must measure maturity across the five dimensions of digital transformation:
- Leadership – represented by KPIs associated with innovation rates
- Omniexperience – represented by KPIs focused on customer advocacy
- Information monetisation – represented by KPIs focused on data capitalisation
- Operating model – represented by KPIs focused on business operations
- WorkSource transformation – represented by KPIs focused on the work and labour supply linked to employee advocacy
IDC has created a digital scorecard to provide guidance on the metrics that capture the success of the future enterprise (see Figure 1).
Figure 1: New Digital KPIs to Shape the Future Enterprise
One of the fundamental challenges of digital transformation is the need to change legacy culture and processes. New metrics of success are a critical element driving this reinvention. Figure 2 illustrates the results of IDC’s global digital leaders’ survey, which show An analysis on how we have correlated the intersection between how mature organisations are with whether they have introduced new KPIs for Digital Transformation.
Figure 2: The correlation between digital KPIs and Digital Transformation Maturity
As can be seen in the chart above, there is a clear correlation between putting in place new digital KPIs and digital maturity i.e. 80% of the organisations that are assessed as ‘best-in-the world’ have introduced these new KPIs. But how are organisations using these KPIs? IDC’s research shows that the emerging best practices focus on presenting results to investors, conducting regular internal reviews and incentivising employees based on the new metrics.
KPIs alone are important, but not enough
As we move into the critical phase of scaling digital transformation initiatives, it is clear that new KPIs are needed. However, KPIs alone are not enough. Organisations also need to provide context and illustrations by showcasing emerging role models in the form of employees and initiatives that deliver the necessary results to drive relevance in the digital era.
This article is part of the IDC series “Your pathway to digital success,” written to inspire business leaders to overcome common challenges along their organisations’ journeys.