Facebook Pixel tracking for Egon Expert

Defining and Measuring Digital Transformation

To establish how well a company has or could go about implementing and measuring a program of digital transformation, we must first attempt to understand what it is.

Studying the available literature, we can find several definitions which we will explore, however from survey data as recent as PWC’s 2017 Digital IQ report we can see that for many businesses understating what Digital Transformation or even “Digital” is, is still not clear. The Changing Definition of Digital (PWC, 2017).

This lack of understanding is a key barrier to success for many established businesses adapting to the digital age.

It is also important to note that digital transformation is not a new concept with books on the subject appearing as early as 2000 such as Patel and McCarthy’s “Digital Transformation: The Essentials of E-Business Leadership”. The early focus such as in this work was on the effect of the internet on businesses and how it might be leveraged (Patel & McCarthy, 2000).

It can also be argued that digital transformation is simply a response to the wider societal impact of what has been termed the digital revolution which can find its origins with the invention of the transistor in the late 1940’s. The turning point of the revolution is suggested to be the 1980’s when the use of computers and digital storage became commonplace. It is estimated that 99% of the worlds information is now stored digitally (Hilbert and López, 2011).

The digital revolution and proposed subsequent information revolution are not topics for this post but we must acknowledge that digital transformation for businesses is in some parts a reflection of these larger wholesale changes that are occurring. The term that is broadly agreed upon for this is “Digitization”. (Gimpel & Roglinger, 2015)

Berman and Bell from IBM have broken down the evolution of digital transformation over the last 30 years and how technology has given way to the wholesale need to now digitally transform entire business models. The Evolution of Digital Transformation​​

Digital Transformation Definition.

Digital transformation is a difficult term to define as it can be applied in several ways and not only to business. At the human societal level Kaplan on speaking about challenges for Information System research describes digital transformation as “the changes that digital technology causes or influences in all aspects of human life”. (Kaplan et al., 2004).

This is reflective of the sweeping change that digital has had to all areas of human life but not necessarily focused on a business level. From this we can at least start to understand the breadth and depth of digital transformation.

In terms of value creation Reddy and Reinhard propose “In a traditional sense, digital transformation refers to the use of computer and internet technology for a more efficient and effective economic value creation process. In a broader sense, it refers to the changes that new technology has on the whole; on how we operate, interact, and configure, and how wealth is created within this system. It has become clear by now that the digital transformation has an obvious, lasting, and even revolutionary impact, not only on the economic systems and commercial players, but increasingly on the lives of individuals and on society at large” (Reddy & Reinartz, 2017)

Here we can start to understand the economic impacts of digital transformation as well as on society. New possibilities for value creation are mentioned as well as wealth.

In his book Digital Futures, Digital Transformation, Ahmed Bounfour also states that digital transformation does not currently have a clear definition, but suggest it can be thought of as “the use of digital artefacts, systems and symbols within and around organizations”. (Ahmed Bounfour, 2015).

Digital Transformation for Business When we take the context of digital transformation into the purely business space we start to get a clearer picture of what it means for organisations.

Libert, Beck & Wind, writing for Harvard business review put forward that “A digital transformation occurs when you use digital technology to change the way you operate, particularly around customer interactions and the way that value is created” (Libert, Beck and Wind, 2014).

Now we are starting to see the use of digital technology in the frame of the customer and their value proposition. A similar thought is put forward by Myrom with “Digital transformation represents the quest to understand how disruptive technology affects the digital customer experience (Myron, 2016).

With changing customer needs and the ability to deliver or find those needs in new ways comes the requirement for “The realignment of or investment in new technology, business models, and processes to drive value for customers and employees and more effectively compete in an ever-changing digital economy” (Solis and Szymanski, 2016). So the ability to compete in this new “digital economy” is of concern and this can certainly be seen from the effect some of the major digital disrupters of the last few years have had on traditional businesses such as Taxi’s and Uber or movie rentals and Netflix. This fear of being digitally surpassed or usurped is reflected in the below diagram from McKinsey showing how disrupters can quickly overtake incumbent businesses.

Digital Disrupters vs Incumbents (Bradley and O’Toole, 2016)​

“Digital Transformation is application of digital capabilities to processes, products, and assets to improve efficiency, enhance customer value, manage risk, and uncover new monetization opportunities.” (Schmarzo, 2017). As Schmarzo points out though not only can digital transformation increase customer value and efficiency it can also find new revenue sources for traditional business.

Perhaps the most succinct definition for digital transformation comes from Westerman, McAfee and Bonnet, authors of “Leading Digital” which has had a great deal of popularity and may be considered one of the leading texts in this area. They define digital transformation as “to radically improve the performance or reach of enterprises” (Westerman et al, 2014). This is further broken down within the context of the book into:

  • “The What: Digital Capabilities.
  • "The How: Leadership Capabilities”

With this “How” statement we see digital transformation also as a process that needs managing and so should be considered a change management process. (Westerman et al, 2014). Indeed if we look at industry quotes we can see this idea reiterated such as this comment from a leading figure within the business The AA. "Digital transformation is another [term] for what I call business transformation," (Chahal, 2016).

With these statements, digital transformation is being put forward as less about the technology directly and more about leaderships role in dealing with current market conditions, where technology use and the speed of technology change are at unprecedented levels. It is how businesses utilize or exploit technology to create shareholder wealth. If digital transformation can be considered change management for many existing businesses, then like any change management programme it is subject to the same internal or external factors which may determine success. One of the main proponents of change management John Kotter has in recent years started to tailor his well-known eight step change management model towards the same digital transformation themes of agility and the need to act quickly. He suggests that the need for transformations has not changed irrespective of the outside factors and are still for companies to “increase revenues/profits or decrease costs [and] to become more effective or more efficient”. (Kotter, 2017).

Digital Transformation Themes

Whilst there seems to be no consensus on the definition of digital transformation we can begin to pick out specific themes which are surfaced time and time again both in the literature and also in surveys and interviews and applicable to business. These are digital transformations impact on:

  • Customers Interactions
  • Digitization of operations
  • Value creation
  • Business models
  • And ultimately performance

Why we measure

A favourite quote from Kaplan co-creator of the balanced scorecards is by Lord Kelvin the nineteenth century mathematician who stated “If you cannot measure it, you cannot improve it.” (Kelvin, 1883). Kaplan went on to add “Norton and I believed that measurement was as fundamental to managers as it was for scientists. If companies were to improve the management of their intangible assets, they had to integrate the measurement of intangible assets into their management systems.” (Kaplan, 2010). It is this fundamental requirement for businesses that should also be addressed for digital transformation.

Why does Digital Transformation need measuring?

“Capturing the value of digital transformation will be important in most industries—and critical for survival in some” (Olanrewaju and Willmott, 2013) Digital transformation is cited as one of the most important challenges facing business leaders today (Edmead, 2016) ( Capgemini Consulting, 2011) (Libert, Beck & Wind, 2016). Like any aspect of business, understanding and monitoring it is crucial to managing it. Given the apparent lack of consensus on both what digital transformation is as well as how businesses go about developing and executing a digital strategy, this makes tracking and measurement difficult. This is also due to the pervasive opinion that many business projects, especially those around the areas of customer experience have “intangible” benefit and therefore cannot be directly measured, a concept refuted by authors such as Douglas Hubbard (Hubbard, 2014). It is also difficult at the balance sheet/CFO level to understand where the traditional business starts and digital transformation ends from a revenue and profit perspective.

However irrespective to the opinions, it is crucial to any business to have a good understanding of how they are performing and if internal investments are delivering results, digital or otherwise. One of the core components of digital transformation is the ability to create and use data. The amount of digital data available to businesses now is over 100 times what is was to companies just 30 years ago. This ability to access, analyse and more importantly act upon this data can give firms huge competitive advantage.

This adaptability often referred to by others as agility is cited as a major benefit to digital transformation. As Reives and Deimler point out, “Companies are also leveraging their signal-reading capabilities to make operational interventions in real time, bypassing slow-moving decision hierarchies”.

Without the frameworks, KPI’s or data to be able to measure both internal transformation and so called “global megatrends” (Naisbitt, 1982), companies are in the dark. In a recent survey by McKinsey the second biggest challenge to prioritising digital programs was stated as “Lack of data and understanding of how digital trends affect industry and organizations performance” (Bughin, Holley & Mellbye, 2015).

Similarly a recent MIT Sloan Management Review survey found that both defining, setting and then measuring the right key performance indicators for digital transformation were the biggest issues with over half not setting any targets at all. The ones that did employ KPI’s still admitted to using “fuzzy math” when it came to making measurements and setting goals (Fitzgerald et al., 2013).

John Kotter while not directly addressing measurement does define the need to be able to create and validate short term wins as part of an accelerated (digital) transformation program. “A body of wins data that tells the story of your transformation is validated, quantifiable and qualifiable terms”. This quantification is seen as a vital step to not only validate actions but also to “energize your volunteers to drive change”. (Kotter, 2017)

How Can it be Measured? MIT Sloan further reports that as little as 50% of digital projects have a business case, with survey respondents quoting issues of intangibility and an inability to calculate ROI. Worse still just 25% have assigned key performance indicators to monitor and measure the effects of digital transformation projects. (Fitzgerald et al, 2013)

Capgeminini one of the world leading transformational consultancies states that “Most companies are struggling to quantify the impact of digital transformation” with research conducted with MIT Sloan suggesting that “78% of executives consider it to be a critical issue” At the same time decisions, do still need to be made and in the same Capgemini report using Gartner data they state that the vast majority of these decision are being taken by traditional senior management positions such as the CFO or CEO who will in most cases look at technology investments in terms of return on investment. Which they state “fails to capture the full value of digital investments” (Colas et al., 2014).

From the survey data we can see clearly that companies are struggling with measurement of digital transformation in fact even Kaplan famous for his work with Norton creating the balanced scorecard states: “Our thesis is the intangible assets don’t have a value by themselves. It’s only when they are linked and aligned with the company strategy that the value is created” (Koch, 2003). The clear limitation of this theory being that you are unable to quantify value of projects unless they are totally aligned to your business and its overall value increases. This theory also suggest that you would ultimately still be unable to attribute causality.

Capgemini offers a different view and suggest that digital investments can be split into three broad areas of:

  • BAU (Business as Usual) / Maintenance. These are required to maintain current digital activities e.g. keeping your website or ecommerce store running, data or security compliance, platform upgrades. They suggest that these should not be linked to ROI but would have KPI’s around “conformance to budget, schedule, productivity and quality”.
  • Transformative. “Cost Intensive” these investments are directly linked to the companies digital transformation strategy and often have either been created by or fully endorsed by the CEO and senior leadership. Large scale platform investments, such as a decision to invest in Salesforce for CRM would be a relevant example. Again, they suggest ROI should not be used to track these investments as sign off and approval has already come from the highest level.
  • Emerging Technologies. These are unproven technologies or enterprises that are of interest to the company but carry some risk, either from the rate of change or a lack of knowledge in the business e.g. “Investments in emerging digital platforms, devices, channels, services”. In these cases, the argument is against using ROI (at first) favouring more agile approaches that fit with this more speculative investment.
  • They suggest that companies can
  • Start (and stop) multiple projects to effectively spread their bets
  • Create incubator programs or “pilots” to test ideas with a limited scope and budget which can gather data to support major business cases later.
  • Use data from credible third parties already in the field.

(Colas et al., 2014) Their format at least assigns some rough classification to the various types of transformation projects but other than suggesting that ROI should not be the primary KPI offers little else in the way of metrics. Where they do give some guidance is around business as usual activity, which in most businesses already have some targets assigned.

In the book “Leading Digital” by Andrew McAfee, Didier Bonnet, and George Westerman one of the most fundamental parts of their suggested 12 stage plan is measuring, monitoring and iterating. This is all part of sustaining the digital transition as they put it. In their work they state management processes need to allow for measurement and monitoring and have visibility to allow for adaptation at any time. These and reviews need to be done regularly and with great vigour and digital initiatives need to be clearly linked to transformation goals and strategic scorecards. In their work they describe what they call “Digital Masters”, these are both the people who are bringing in digital transformation into businesses and businesses who achieved digital mastery. These so called Digital masters they argue improve both revenue generation as well as profitability of the company. They also provide knowledge, resources as well as key skills that will help the business drive forward. But to be able to do this and then measure success. “Sound data must be accessible in real time to both the people and equipment that utilize it, and overcoming constraints and revamping “legacy systems” may be necessary to accomplish this” They argue that there are clear differences that can be tracked in companies that promote digital mastery. Based on their research and investigation of over 100 companies they propose that these companies have higher revenue generation efficiency and much higher profitability.

This suggest that the same metrics could be used as broad indicators (along with others) of successful digital transformation at other companies attempting similar endeavours. If digital transformation does increase both revenue generation and profitability, then potentially its impact could be tracked. However as with Kaplan’s comment, the causality of proving the link between specific actions and outcome is tenuous.

I spoke directly to Didier Bonnet one of the co-authors of Leading Digital and he said “I guess profitability is the overall measure of success, but in a programme it is important to measure other metrics to gauge success e.g. Productivity if you are using digital in operations or customer contact conversion ratio if you are using social media as a commercial tool. Important to link your metrics to what the transformation is trying to achieve. And of course not everything can be measured, they are some foundational investments that need to be made e.g. Platforms, infrastructure et al” (Bonnet, 2017).

Digital Transformation Scorecards Many proponents of digital transformation put forward the use of scorecards and KPI sets as a means of tracking digital transformation performance. In the Leading Change model (Westerman et al, 2014) digital capabilities are broken down into three broad groups of customer experience, operations and business model. These are then further subdivided into specific focus areas and then projects.

Similarly Coleman Parkes Research has identified four core components of digital transformations, business agility, business growth, customer focus and operational efficiency. Again these are subdivided into more specific KPI’s for each particular area.

Olanrewaju and Willmott doing research for well-known consultancy group McKinsey have also put forward a similar framework.

Again we can see similar themes of the key drivers of agility and customer experience but as regards to measurement and control they do offer more specific advice that “Investments should be proportional to the value at stake”. Conversely to some other advice they have a more robustly sales and cost reduction criteria for how digital transformation projects should be addressed. They suggest that companies be selective in the projects they push forward with, only choosing high ROI or “best customer outcome” though sadly there is no extrapolation of how to measure a good customer outcome or what that is. They also put forward that investments should be holistic and so supporting infrastructure should always be part of the planning of more tactical plans due to the increasing interdependencies with businesses. The other main message is also about understanding your entire business and when to allow internal cannibalisation either partially or wholly as some business areas will undoubtedly not survive the transition to digital (Olanrewaju and Willmott, 2013).

It should be noted that scorecards are not uncommon for business performance management and in some ways these are similar to already accepted formats such as Kaplan & Norton’s Balanced scorecard which focuses on the differing perspectives of Financial, Customer, Internal and Learning & Growth. In fact as Kaplan points out the purpose of the scorecard was to help companies give value to so called intangibles, digital or otherwise (Kaplan, 2010).

The possibly limitation of the balanced scorecard and similar business performance frameworks is that they require companies to know what to populate the scorecards areas with. Given the literature suggests that many companies do not have a firm grasp on what is necessary or rather worthwhile for digital transformation this could mean that companies are unable to use the standard balanced scorecard for this purpose. These newer frameworks give more granularity based on data gathering as to the main focus areas for digital transformation, though again it could be argued that even their sub focus areas are merely business best practice rather than digital transformation.

Whilst for the purposes of this post we will not be doing a full analysis of "agile methodology" given it is being adopted by numerous organisations we will discuss its possible impact on measuring digital transformation. There are many "flavours" of agile but I will refer to the Scaled Agile Framework as my reference as I have a qualification in this variety. By its own definition “agile is inherently more measurable than prior proxy-based, waterfall metrics of progress.” It is also built on some core principles listed below that are aimed at always ensuring delivery in the “shortest sustainable lead time, with best quality and value to people and society.” (Scaledagileframework.com, 2017)

SAFe Principles

  • Take an economic view
  • Apply systems thinking
  • Assume variability; preserve options
  • Build incrementally with fast, integrated learning cycles
  • Base milestones on objective evaluation of working systems
  • Visualize and limit WIP, reduce batch sizes, and manage queue lengths
  • Apply cadence, synchronize with cross-domain planning
  • Unlock the intrinsic motivation of knowledge workers
  • Decentralize decision-making

Whilst these are not intended to be written as part of digital transformations strategy, the ways of working and principles for scaled agile can be seen as inherently similar to some of the themes we have seen in other strategies and in the earlier digital transformation definitions. Within the principle of “take an economic view” further rules have also been laid out for measuring value.

  • Economics and business value are used to prioritize Features and Stories
  • Economic risk and viability is considered for Features, Stories, and Enablers
  • An Economic Framework is used to evaluate market conditions, cost and development expense
  • For economic alignment of Features, User Stories, and Enablers to the PI objectives

These principles put firmly in place the need for continuous adjustment and strong measurement and within the framework budgets are set at what is termed the “value stream” level. This is a strategic level for large scale program or even business units, rather than at the individual project level (Sirkiä and Laanti, 2013). Whilst the business should apply their own objectives to the programs, agile does highlight the following as key metrics that should be included.

  • Customer Satisfaction (and engagement)
  • Cost of Delay
  • End to End Lead Time
  • Customer Net Revenue
  • Employee Satisfaction.

Similar to the other frameworks we can see similar focus on customer satisfaction, agility and some focus on costs and revenue. We can also see the metric of employee satisfaction which was not called out in the other models except in terms of employee efficiency. As a metric it could be seen as hugely important, with reports suggesting that companies with greater employee satisfaction have greater financial performance (Gregory, 2009).

Key Points on Digital Transformation

Studying all the available literature we can say that:

  • The main themes of digital transformation impact are:
    • Customers Interactions
    • Digitization of operations
    • Value creation
    • Business models
    • Business performance
  • Most businesses are not clear on how best to define digital or digital transformation.
  • Many businesses don’t have clear KPI’s or metrics for digital transformation.

Key Performance Indicators for Measuring Digital Transformation

We can also state that while there are many possible ways to analyse and measure digital transformation we are able to pinpoint some strong reoccurring themes.

From the available literature the main themes for KPI’s are:

  • Customer Satisfaction and Experience
  • Return on Investment
  • Cost Control
  • Quality
  • Productivity and Agility
  • Net Revenue and Profitability
  • Operational Performance
  • Employee Satisfaction and Productivity
  • Innovation

Conclusion

It's clear that there is no single approach to digital transformation and any approach needs to reflect your business, its goals and the common themes that run through it. At CommerceCentric we have identified the main performance indicators which should be measured to gauge digital business success and developed an approach that can help businesses succeed through deep digital auditing and bespoke business solutions. In our approach we always concentrate on delivering against Net Revenue and Profitability as our main performance indicator.

Explore our Digital Transformation Service

The Author

Philip Driver is the founder and lead consultant of CommerceCentric a holistic digital consultancy. If you need help developing your digital strategy, identifying opportunities through our digital auditing capabilities or just reaching the next level in your digital maturity contact us today.

References

Posted in Digital Transformation on Apr 16, 2018

Contact Us

How can we help? Just call us, email info@commercecentric.com or send us the form below.

020 3287 7172

CommerceCentric
9 Greyfriars Road
Reading
RG1 1NU
Berkshire
United Kingdom