How to Measure and Maximize Digital Transformation ROI

Implementing new technology is an important part of business growth and one that allows organizations to greatly improve efficiency, increase revenue, and reach long-term goals faster. But measuring the exact impact of the digital transformation projects and their ROI can be a difficult task.

In this article, we’ll explore what digital transformation is, how to effectively measure its ROI, and share best practices of maximizing it.

Key takeaways:

• Digital transformation is the practice of implementing technology with the aim of improving a company’s processes, business model, or business domain.
• The formula for digital transformation ROI is ROI = Net profit from investment / Cost of investment.
• The difficulty of measuring ROI of digital transformation projects is in multiple hidden costs and intangible benefits that it brings.
• The best practices for maximizing ROI of such projects are setting realistic and concrete goals, investing in the right tools, contracting skilled personnel to handle implementation, and cutting projects that don’t meet desired goals. 

What Is Digital Transformation?

Digital transformation is the process of integrating technology, specifically new and advanced software, in a company’s workflows with the aim to improve its efficiency and ultimately to grow its revenue. To that end, digital transformation officers typically seek ways to:

• Automate processes.
• Cut costs.
• Receive better insights.
• Meet growing customer expectations.

While digital transformation is necessary for growth and provides multiple benefits to the companies implementing it, it’s rarely a straightforward process, especially in terms of determining its practical impact on an organization.

Areas of Digital Transformation

Digital transformation typically happens in one of these areas.

Process transformation

The easiest way to introduce new technology into the company is to transform and streamline business processes the company uses. This typically involves implementation of artificial intelligence or other tools to automate and improve tasks that are either menial and time consuming or challenging and may involve human error.

Examples of those are:

• Data entry.
• Note taking.
• Resource scheduling.
• Email management.
• Lead scoring.

Business model transformation

A deeper area of digital transformation is using technology to transform the business model. This can take the form of developing a digital interface for a company that didn’t have it before, adding a new way of interacting with the company, like an AI-based chatbot, or using technology to retrieve better insights from company data to improve its services.

Business domain transformation

The most challenging area is transforming the business domain with technology. This typically  involves utilizing tech to find new markets and create new products that will change the way a company operates or vastly broadens the type of work it does. Process transformation is also a part of this area of digital transformation as it allows the company to save resources and focus them on another domain.

Key Benefits of Digital Transformation for Business

The difficulty of digital transformation is offset by the following major benefits.

Improved workflow efficiency

Many avenues of digital transformation revolve around automating or streamlining parts of processes or whole business processes. This inevitably leads to improvements in efficiency and reducing the time processes being transformed take to finish.

Overall operational capabilities also improve due to this efficiency, as the digital transformation process focuses on parts of the workflow that are either tedious or have a possibility of human error. So improved workflows will be less prone to errors and will free up employee time for more productive tasks.

New and improved revenue streams

Introducing digital transformation is often aimed at exploring new markets, products, and business opportunities. Receiving better insights on the current business functioning can help decision-makers understand which revenue streams should be invested in to maximize profit.

Read more: Project Portfolio Optimization: A Guide to Maximizing Business Value

Cost cutting

Apart from the possibility of introducing new revenue streams, digital transformation can improve a company’s profitability through cutting costs. Typically, using AI or automation software can greatly reduce the cost of performing a task through reducing the number of work hours it requires.

Improved customer satisfaction

Introducing more avenues for customers to interact with a business through different digital channels is likely to improve customer satisfaction as modern customers prefer multiple modes of interaction and expect fast response times.

How Is Digital Transformation ROI Calculated?

The ROI formula used in digital transformation calculations is the same as everywhere else:

ROI = Net profit from investment / Cost of investment

The challenge of calculating ROI of digital transformation lies in the details. Determining what the profit from investing in such a company-wide investment as digital transformation can be is quite hard. Let’s look at two major scenarios of doing that and how it relates to ROI calculation.

Tangible gains

With tangible gains, such as direct revenue increases from new markets or cost cutting from automation, calculation can be pretty straightforward. For instance, if a company invests $20,000 in automating the process that costs $2,000 monthly in billable hours, the ROI calculation would look like this:

(($2000*12) - $20,000)/ $20,000 = 20%

With technology like AI it might be necessary to take recurrent spending into account.

Intangible gains

With intangible gains such as receiving better insights or improving customer satisfaction score, measuring ROI is more difficult. There are two paths an organization can follow:

• Develop a formalized way to translate intangible benefits into monetary values.
• Abandon ROI as a metric and judge the success of digital transformation by meeting KPIs instead.

Both approaches have their downsides, though. Financial value estimations can be too optimistic, and simply meeting set goals doesn’t communicate much about the financial viability of the investment. 

How to Create a Digital Transformation ROI Framework

Businesses need to build an effective measurement framework for digital transformation ROI before starting the process. Here are the main steps of building this framework.

Define the objectives

The first step is defining concrete objectives of deploying new tech. Starting the transformation process without this step doesn’t just prevent effective ROI calculation but might also lead to a lot of wasted effort in the process.

An example of an objective like that would be improving resource utilization in production projects. One of the ways to achieve this is implementing resource management software that improves capacity planning, workload balancing, and resource allocation.

Evaluate current performance level

The next one is to estimate the current performance. In terms of ROI estimates, you’re mostly looking for financial information like:

• How much processes cost.
• How these processes drive revenue.
• What inefficiencies prevent a better cost-benefit ratio.
• In what areas investment can drive the biggest improvement.

Select the KPIs

Once you know the current performance picture, set up the KPIs you’ll use to measure the effectiveness of digital transformation. In terms of financials, those KPIs are straightforward and related to either new revenue streams or to cost cutting.

For other areas, choose KPIs that reflect potential positive changes introduced by the transformation. For instance, the outcome of implementing resource management software is  improving resource utilization. Choosing KPIs of turnover score and employee satisfaction score can help control for that.

Execute, monitor, and adjust

With those steps taken, start implementing the digital transformation plan and monitor its progress. If KPI milestones are not met, investigate whether the issue is in too optimistic planning or poor execution and adjust company actions accordingly.

KPIs for Digital Transformation

Financials are a crucial area of interest, but according to PwC’s guide, there are other six areas of metrics relevant to digital transformation. Let’s take a closer look at each category.

Financial metrics

Financial metrics are the core of ROI calculation and should be tracked for most digital transformation initiatives with the utmost precision. In this set of metrics, organizations can track:

• Customer acquisition cost.
• Customer lifetime value.
• Cost saving.
• Revenue growth.
• Revenue growth rate.

Operational metrics

This set of metrics can be used to track the impact of digital transformation on business process efficiency. A few examples of these are:

• Throughput.
• Inventory levels.
• Supply chain efficiency.
• Lead times.
• Resource utilization.

Employee metrics

Employee metrics are mainly used to monitor employee satisfaction:

• Employee turnover.
• Employee engagement.
• Likelihood to recommend the company.

Customer-centric metrics

These metrics are used to monitor customer satisfaction. They include:

• Net promoter score.
• Customer satisfaction score.
• Social media engagement.
• Net sentiment of engagement and feedback.

Safety metrics

This set of metrics is used to measure cybersecurity improvements. It’s only relevant if the digital transformation being implemented is focused on that area of business.

• Number of privacy breaches.
• Number of threats detected.
• Number of threats dealt with.
• Fraud losses.

Infrastructure metrics

In case digital transformation in the company is aimed at introducing new or improving old business infrastructure, organizations can measure:

• Uptime.
• Speed of implementation.
• Time to respond to issues.

Innovation metrics

If a business aims at innovation either in new markets or new products, these metrics can help measure the efficiency of its actions:

• Proportion of ideas that reach the concept stage.
• Proportion of R&D projects with a successful prototype.
• Number of new clients from launching products.

How To Maximize the ROI of Your Digital Transformation?

A 2021 McKinsey survey suggests 70% of digital transformation initiatives fail to meet their goals either fully or partially. In this section, we’ll explore what your business can do to be in the remaining 30%.

Create clear targets

One of the most common mistakes organizations make when starting their digital transformation journey is pursuing transformation for the sake of it, without setting concrete measurable goals. This leads to lack of direction and a lot of wasted effort in the process, even if at the end the results are satisfactory. Overall ROI of the transformation project is therefore hurt.

To avoid this, set clear and measurable objectives for all digital transformation initiatives.

Invest in the right tools

Few organizations invest in creating digitalization tools from scratch, unless we’re talking about building proprietary infrastructure like databases or web apps. Most will choose to use a purpose-built tool for process automation or enhancement. Doing research to understand what type of tool is best for you is crucial for the success of the transformation efforts.

Apart from your tool of choice having all the features necessary to achieve your goals, its scalability should be taken into consideration as it affects ROI greatly.

Entry-level tools with low scalability might produce initial results, but once a need for more features arises and the organization needs to find another tool, the implementation costs are lost. Enterprise-level tools might require too high implementation costs that will create a negative ROI at first.

The best choice is a scalable tool with a moderate implementation cost.

Contract specialists for the integration process

According to McKinsley, the primary reason for digital transformation failures is lack of skill in the team implementing it. To facilitate success, supplement the team with third-party specialists with the appropriate knowledge. In most cases, you’ll find that the tools you’re integrating into your workflows have a dedicated team that can handle the integration and coach your employees.

Cut investments that are not showing results

Digital transformation initiatives are investments, just like any other project a company undertakes. If that investment shows poor results, continuing to funnel money into it will only lead to a negative ROI.

That’s why measuring the ROI of digitalization and monitoring its progress is crucial. If the chosen KPIs vastly differ from predictions, the team can either adjust the process or abandon the project entirely to cut the losses.

Track a balanced set of metrics

Cherry picking metrics that are improved and ignoring the ones that show stagnation or negative dynamics is a common occurrence. It often leads to teams pursuing projects based on misleading ROI calculations and losing money as a result.

To avoid this, track a broad range of relevant metrics and research to find hidden costs that should be included in ROI calculation.

Measuring Digital Transformation Example: Portfolio Management  Software

A real-world example of measuring digital transformation ROI can bring a bit more clarity to the explanation of the process. Let’s take a look at how it can look when implementing a project portfolio management tool like Epicflow.

Epicflow is a tool that focuses on AI-driven resource and portfolio management in complex multi-project environments and can help organizations improve efficiency of their resource use and increase the value delivered by limited resources . It can be used for digital transformation of the following areas:

• Enterprise portfolio transformation. Epicflow facilitates portfolio optimization by maximizing the value delivered under resource constraints predicting delivery dates, and sequencing projects.
• Capacity planning transformation. Detecting and mitigating bottlenecks with Future Load Graph.
• Scenario planning  transformation. Simulating outcomes of portfolio management decisions with What-If analysis.
• AI-based decision support. Organizing projects and resources based on resource capacity and project priority with Epicflow AI Portfolio Optimizer.
• Financial planning transformation. Supporting financial planning and financial impact analysis that is directly linked to project execution, resource utilization, and portfolio decisions.
• Integration with the digital ecosystem. Epicflow integrates with Jira, MS Project, and other software that might be in use in an organization that’s pursuing digital transformation.

As a result, organizations make better planning decisions, improve alignment between strategy and execution, and increase portfolio value with resources available.

Now, how do you measure ROI of Epicflow implementation?

One part of the ROI formula requires implementation and maintenance costs. To find these, you’ll need to add the cost of:

• Initial implementation.
• Integration with existing tech stack.
• Training.
• Change management. 

A straightforward calculation would be to compare the costs to the YoY increase in revenue after the implementation, but that metric can be influenced by multiple other factors. Here are a few items you can add to the list of financial impacts:

• Difference in revenue based on the increase of the number of projects finished.
• Cost cutting by resource productivity gains. If 5 hours billable at $35 were cut weekly, it adds up to $8400 in annual savings.
• Cost cutting by headcount increase avoidance. If by implementing Epicflow an organization avoided hiring 3 employees at $50,000 annually, that’s a $150,000 annual saving.

Measuring some benefits of Epicflow like improved visibility and ease of planning is difficult, but you can turn to more concrete PMO KPIs to visualize its impact:

• Lead time decrease.
• Work in progress decrease.
• Throughput increase.
• Resource utilization rate.
• On-time delivery percentage.
• Projects delivered in a time period.

In the case of Dutch Ministry of Defence, Epicflow implementation led to the following outcomes:

• 30% lead time decrease.
• Due date performance grew from 24% to 77%.
• The top 50% of high-impact projects  were delivered 424 days earlier than planned.
• No headcount increases were needed to achieve that.

Book a call with our team to learn more about Epicflow implementation and its ROI.

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