Digital transformation has become an overused — and often misused — term. Some even say we should stop talking about it, fearing it has become a meaningless marketing slogan. But the reality is that digital transformation is a priority for over 90 per cent of European organisations. These firms are now trying to leverage the power of technology to reinvent their business model, and digital is becoming business as usual for those striving to stay relevant in the future. Digital initiatives are shifting from one-off projects with a focus on testing emerging technologies, to the delivery of business outcomes.
In this context, the difficult questions about the associated return on investment (ROI) from digital initiatives are being asked at the board level in European organisations. IDC’s research shows that 65 per cent of chief executive officers in the region are already under significant pressure to deliver a successful digital transformation strategy. Consequently, these organisations are making massive investments to enable improvement across three critical areas: customer excellence, operational efficiency and employee productivity.
IDC forecasts that European spending on digital transformation will reach more than $231 billion by the end of 2019. IDC’s research shows a strong correlation between becoming a digital organisation and driving revenue and profit growth. On the other hand, non digital organisations are seeing both their top line and their bottom line shrinking over time. Figure 1 illustrates the financial impact of digital transformation in the manufacturing space.
Figure 1: The financial impact of digital transformation. Source IDC, 2019
- Digital manufacturers have implemented digital transformation, have a dedicated designation (chief data officer, digital transformation officer, chief innovation officer, etc.) and make significant research and development technology (R&D) expenditures.
- Semi digital manufacturers are on the path to becoming digital but have just started digital transformation implementations. These organisations tend to have moderate R&D expenditures.
- Non digital manufacturers haven’t started their digital transformation journey, nor have they taken the initial steps to transform their business model by leveraging the power of technology.
Laying out the financial road map for digital transformation
Even though there is a correlation between digital maturity and growth, reinventing the entire business model doesn’t happen overnight. Digital transformation is a multi-year effort, and its ROI doesn’t always come in the short term. That’s why it is very important to manage the expectations of investors and the board of directors by laying out a financial road map for your organisation’s digital transformation. This road map should provide an overview of the status of digital investments across the short term (Horizon 1), midterm (Horizon 2) and long term (Horizon 3).
IDC’s recent end-user survey of global digital executives shows that 57 per cent of funding for digital initiatives comes from capital investments and cost optimisation sources — which is typical for most organisations in Horizon 1 of the financial road map for digital transformation. In only 7 per cent of situations, digital revenue streams are the source of funding for new digital initiatives. However, this is the scenario that all organisations need to plan for in Horizon 2. Longer term, in line with IDC’s prediction that 75 per cent of organisations will be completely digitally transformed by 2029, digital will become “business as usual”. Consequently, digital initiatives will be funding the rest of the business. This is where organisations ultimately need to be: in Horizon 3 of this financial road map for digital transformation.
Figure 2: The financial road map for digital transformation
IDC believes that organisations will need to put in place a set of metrics that capture the value of digital transformation across these three horizons of the financial road map, thereby setting up new internal key performance indicators (KPIs) and reporting digital success effectively to employees, investors and other external stakeholders. In this process, organisations are redefining the meaning of ROI around digital transformation — the new ROI will be the “return on innovation”.
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.