Propelled by the COVID-19 pandemic, digital transformation has taken hold, with some 75% of companies telling research firm Metrigy they have a digital transformation initiative underway or planned. Projects range from using chatbots to overhaul customer engagement, to the automation of manufacturing operations.
As digital transformation projects increase in scope, demonstrating a compelling return on investment (ROI) is vital for digital transformation teams to earn support and funding for additional digital initiatives. Yet many companies are overlooking ways to measure ROI and improve it over time.
Digital transformation is defined as the innovative application of a new or existing technology that improves or creates a process, product or experience that ultimately drives business value. Digital transformation initiatives typically address several goals, including revenue increase, customer experience improvement, cost reduction and employee productivity gain. Ultimately, for-profit companies want to raise profits, while not-for-profit organizations want to run more efficiently.
When asked about overall business priorities, customer satisfaction was at the top of the list (see chart below). It's not surprising that the majority of digital transformation initiatives we see are focused on improving the customer experience, with 65% of companies indicating they have a CX transformation project underway or planned. The goal is to use technologies such as artificial intelligence, analytics and self-service to improve customer interactions, delivering an ROI that can be measured in several ways.
How do you calculate digital transformation ROI?
The tendency of some business leaders is to insist a digital transformation project be up and running ASAP, pointing to competitors who have digital transformation roadmaps in place. But transformative projects such as improving customer service or increasing efficiency with new technology require careful planning -- it's imperative to slow down and think methodically about the project in order to calculate a realistic ROI.
Here, we outline the steps you need to take to measure and improve digital transformation ROI, using an example in the healthcare field as a model.
- Identify the project. Address a business problem or opportunity. For this first step, think about how existing or new technology could be used to better adapt your business model to market conditions. For example, COVID-19 not only forced many companies to implement systems that enabled remote workers, it also opened up business opportunities. We saw distilleries pivot from making spirits to making hand sanitizer to meet shortages. Battered by prolonged lockdowns, some restaurants pivoted to delivering ready-to-eat food or meal kits. In the healthcare example we'll be following throughout this article, let's imagine that a four-physician medical clinic identifies an opportunity to start a telehealth line of business to serve patients who are unable to get to the clinic and can be served remotely.
- Review business goals. Decide the business goals the project should address. Will it increase revenue, decrease costs, improve customer ratings or boost employee productivity? In our healthcare example, the goal might be to increase the number of patients seen per hour, thus increasing revenue. Adding telehealth services also might improve patient satisfaction ratings, resulting in more referrals to grow the practice.
- Determine investment metrics. The investment figures typically should be detailed and may include technologies and services, including network infrastructure, applications, monitoring tools and security, along with project staffing, direct sales, customer service, advertising/digital marketing, user awareness and adoption, and consulting. In our medical clinic example, let's calculate that the initial infrastructure and associated marketing to start a telehealth service costs $320,000, and the ongoing costs to support the system are $65,000.
- Determine value metrics. Identify the metrics needed to show the return on the budgeted investment. For example, the before-and-ongoing metrics required to show success or failure of the identified business goals in the medical clinic project include the number of physicians, number of patients seen per day, average revenue per patient, patient satisfaction score and referrals per patient.
- Set a timeframe. Stakeholders funding these projects rarely have patience for results, and the average timeframe to complete a project is six months. Therefore, when calculating metrics, start by noting the baseline figures (what are they today?) so that there is a basis for comparison once the project is complete. In our example, the project -- including marketing and training -- will take six months.
- Run the math. In our example, our baseline shows that the four physicians each normally see 20 patients per day, with an average per-patient revenue of $350. Annual revenue is $7.28 million. With telehealth, they can see 2.5 patients per hour, with an average revenue per patient of $200. Now the total annual revenue is $8.32 million, or an increase of $1.04 million per year.
- Calculate the ROI. In the first year, costs are $320,000, but revenue calculations are only based on six months because of the time it took to set up the systems for the telehealth model. So the ROI is $200,000, meaning the investment costs are not recouped yet. But, by the second year, the ROI is the full revenue minus costs, or $975,000.
- Determine additional digital transformation business benefits. Some benefits may be hard to quantify initially and also may require new tools to track, so the business model must factor in "what if" scenarios. For example, if this practice knows already that it receives an average of 0.3 referrals for each patient, it can track whether the figure increases with the new telehealth practice and if those referrals were the result of a patient using the service. If that's the case, the project owner can add the additional revenue from the referred patients to the equation, documenting even more success.
How can you improve digital transformation ROI?
There are numerous additional factors that go into an ROI, such as depreciation, net present value, additional ancillary costs that emerge in designated years and more. The key is to measure baseline figures, track costs and the scheduled timeframe to complete the project, and to document long-term success. It's important to look for ways to improve with each new digital transformation initiative, so business outcomes become more and more convincing to support the next project.
Follow these tips to improve ROI on your digital transformation projects.
- Build your ROI model ahead of time. Use estimated figures to make sure you're tracking all the pertinent metrics. You don't want to come to the end of the project only to realize you should have been gathering figures that you weren't because then it's too late.
- Get the word out. One of the biggest reasons transformation projects -- along with the anticipated ROI -- don't come to fruition is employees or customers don't know there is a new technology or process that can result in benefits. Culture plays a critical role in the success or failure of digital transformation projects: The more people affected by the transformation initiative, the bigger the ROI, typically.
- Take time to plan. Often, IT or business leaders are in such a rush to get a project off the ground, they don't take time to gather business unit requirements or estimate the time it takes to test applications or train people. This is a recipe for digital transformation failures. When time and cost estimates exceed expectations, the transformation already has a dark cloud over it before the first ROI figure is reported. If you plan properly and set expectations realistically, the project will run more smoothly.
- Evaluate technologies carefully. ROI is significantly affected by technology selection. Don't just select the cheapest technology to improve the ROI. You may find value in spending more on an application that is easier to manage: The upfront cost will be greater, but the operational costs will be lower, increasing the ROI over time.