Map before you measure

Prioritizing digital initiatives is an essential first step we’ve written about frequently, but it’s worth repeating—and it falls directly on the CEO’s shoulders. CEOs should ask themselves today, “Does my organization have a clear road map of digital priorities, rather than a basket of digital projects?” The purpose of this road map is not just to get from point A to point B. It’s to force the organization to prioritize three to five bold initiatives, meaning digital moves that have potential to make a material difference in the organization’s overall performance, and to focus resources accordingly. Perhaps the most common pitfall we see in failed digital strategies is the tendency for leaders to greenlight every project. However, doing so runs the risk that none will achieve enough scale to change behavior, mobilize the broader organization, or drive material impact.

Five metrics for the digital CEO

When implementation of the prioritized digital road map has begun, it is time to start measuring performance. Given the scale and complexity of digital transformation, measurement is critical to ensure that all the expense and effort of digital investment are paying off with improved performance. CEOs should monitor five broad markers to assess the organization’s digital progress accurately (Exhibit 1)

1. Return on digital investments

Measuring the return on digital investment is both standard and essential. CEOs should look not only at the value being provided by individual priority digital initiatives but also at initiatives’ collective support of strategic organizational goals. Keep in mind that there’s no such thing as standing still; to make little or no investment relative to the competition is to fall further behind. Thus, digital investment is also about loss avoidance.

To maximize returns, we recommend transforming one business domain at a time and broadening from there for traction and coherence. “Domain” here refers to a critical process, customer or employee journey, or function. For example, a marketing domain for a consumer-goods company might include customer acquisition, pricing, cross-selling, and retention.

Transforming domains one by one allows organizations to leverage similar data sets, technology solutions, and team members for multiple use cases, which ultimately saves time and expense. A retailer, for example, could transform the in-store customer-experience domain by using the same geospatial and store data to optimize store footprints, prioritize capital expenditures, and personalize local assortment, allowing the company to leverage investments in data preparation (cleaning, linking, and so on). In addition, when use cases are linked, a broader cross-functional team can cohesively work together to deliver value across the domain, often far exceeding the value derived from single, disparate use cases across different areas of a business.

Another way to maximize return on investment is to direct enough resources toward promoting adoption of new digital tools. An interesting predictive insight is only as useful as the response it enables. For example, data identifying the customers most at risk of buying elsewhere can retain customers only if marketing or sales associates take effective actions to keep those customers happy. In that example, the team building digital or analytics solutions must not only build a tool to surface the insights for marketers but also redesign the marketers’ workflow to enable action. Further, the organization must put in place change-management initiatives that encourage adoption of the solutions. In one study, we found that organizations that were more successful in scaling analytics were four times more likely than other companies to spend half their analytics budgets on adoption and change management.

While the greatest returns for many companies come from directing digital investment toward growth initiatives, taking a bold approach to efficiency gains can also yield dramatic results (see sidebar, “Don’t count out efficiency plays”).

2. Percentage of annual technology budget spent on bold digital initiatives

Organizations that spend only a small proportion of their technology budgets on enabling the most strategic, bold digital initiatives are unlikely to maximize return on digital investment. The allocation of technology spend is a leading indicator CEOs can monitor to ensure that the organization is positioned to deliver digital-backed value.

Business technology is shifting away from a monolithic IT architecture and toward microservices, best-of-breed tools for specific use cases, and custom application development. These tools and approaches allow teams to rapidly create products and services that will drive maximum value. Digital natives have used them to infiltrate nearly every sector. Many legacy companies, however, are still caught up in overly complex technology stacks that consume massive resources.

Consider the banking industry. Our research suggests that many banks spend about 92 percent of their digital budgets on infrastructure and maintenance, leaving only 8 percent for business-improvement initiatives that can fuel growth. That is not a sustainable paradigm for any business, given the current pace of innovation and disruption. Digital attackers and venture-capital-backed digital-banking ventures put most of their resources toward initiatives that move the needle on performance, such as entering new markets, improving customer experience, or boosting efficiency. And they usually aim those efforts at the most profitable segments and products in the traditional bank portfolio. We believe that banks should dedicate no less than 25 percent of their digital budgets to growth initiatives.

Of course, one reason incumbents spend so much of their digital budgets on infrastructure and maintenance is that they have legacy systems that have grown increasingly complex and outdated, with layers that might be 15 to 20 years old, riddled with code in outdated languages. Simply replacing these systems may not make sense, due to cost and potential disruption to business processes. Instead, companies should push for simplification and renewal across the systems that drive the greatest business value. One large North American bank did this by essentially breaking its technology platform into a set of microservices and prioritizing the areas that would enable it to develop apps faster. The bank achieved a 30 percent decrease in the cost of making changes to core systems. The time to market for new digital products shrank from more than 12 months to just three or four months. Meanwhile, customer-satisfaction scores climbed from average to market leading, and revenues from digital offerings increased from less than 10 percent to more than 40 percent.

Traditional companies that take this approach may never have the same flexibility in their IT systems as digital attackers. Even so, by continually improving and building on their other strengths, they can be formidable competitors in the digital age.

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