Demonstrating A Convincing ROI With Digital Transformation Initiatives Is Essential To Gaining Corporate Support And Securing Financing For Further Initiatives Or Larger Scale Deployments.
Since our previous ROI articles (IIoT ROI and ROI Case Study) on IIoT and Digital Transformation, we have received a number of direct message requests from industry professionals for Miniotec to further clarify how to best determine the ROI of for their planned or current Digital Transformation strategies. We hope that this article, based on our experiences and methods, will help you in your ROI evaluation efforts.
In recent years, particularly during / since the COVID-19 pandemic commenced, Digital Transformation has taken on a new urgency, with nearly all Companies we talk to or are engaged with, equally reinforced by numerous reports from the Big 4 consultancy firms, affirming that they have a Digital Transformation initiative underway or is planned. Projects range from Robotic Process Automation (RPA) programmes to overhaul internal repetitive inefficiencies, Digital Twin creation and the automation of reliable operations.
As Digital Transformation projects increase in scope, demonstrating a compelling Return on Investment (ROI) is vital for Company digital transformation teams to earn support and validate their digital initiatives.
Yet many companies maintain a very narrow definition of how to calculate ROI, particularly the not so apparent indirect measures, and many are overlooking ways to measure ROI and improve it over time.
By inadvertently understating ROI calculations, many worthwhile digital initiatives that may offer enormous benefit to companies are disregarded. In support of this last statement, according to a recent Harvard Business Review poll*, approximately 90% of respondents concede that they are unable to appropriately estimate ROIs for their efforts.
Predictably, failure rates for Digital Transformation programmes range from 60% to 85%.
The good news is that the majority of Companies that do measure ROI more broadly, considering Direct and Indirect factors, are achieving operational improvement success with realistic timely returns - both in terms of cost and schedule.
There are numerous definitions of Digital Transformation and because it may appear different for Companies, Sectors or Industry, having a singular definition that can apply to all is challenging. Broadly however, Miniotec define Digital Transformation as:
The development of people, the evolution of work processes and the integration of digital technology across all elements of a business, profoundly changing how a Company operates and provides value to its stakeholders - internal and external. Digital Transformation requires a cultural shift in which organisations constantly challenge the status quo, are open to experimentation, become comfortable with rapid failure but are ready to accelerate successes.
So, in lieu of the aforementioned description, how should organisations calculate the ROI of a Digital Transformation programme or initiative?
To begin, regardless of the sort of Digital strategy desired to be deployed in a Digital Transformation programme, a key understanding when it comes to ROI calculations is that Companies should never produce a single ROI result, but rather a range of probable ROI results.
Using the Industrial Internet of Things (IIoT) solutions as an example here for ROI determination, where we guide Clients through Predictive Maintenance strategies, IIoT solutions deliver significant cost savings for maintenance activities, improvements in resource planning (because maintenance teams can now spend more time on proactive maintenance activities rather than mundane data collection activities), and significantly reduced unplanned downtime, which leads to greater system reliability and thus availability.
Data attained from IIoT solutions provides an unprecedented potential for Asset Owners, Manufacturers and Equipment Maintainers to unlock previously "trapped" data and therefore bring enhanced efficiency or significant understanding on how to deliver future operational improvements.
To estimate the probable return, these various impacts are combined into an overall ROI model that connects the many effect chains and then quantifies the dependencies mathematically. The specific situation will determine the intricacies of the effect model, as well as the required granularity. However, the model will always be formed around indicators that measure the performance of the relevant business processes.
The following diagram attempts to articulate this visually. The ROI from the IIoT solution layer is determined by the sum of the savings and benefits across some or all of the various verticals of the impact model.
In reality, the relationships between the parameters in the impact model are frequently difficult to determine owing to lack of previously measurable or collected data. The modelling of these impacts is therefore typically a multidisciplinary exercise involving business managers and subject experts. Joint workshops will assist the Digital Transformation team in better understanding operational concerns and subject specialists will aid in identifying significant business issues.
The goal of determining ROI is not to be cautious or aggressive, but to be as precise as possible.
Referring to the first narrow ROI chart above, which only considered productivity improvements, it is clear that the potential ROI will improve significantly with the breakeven period becoming shorter and the derived profit increasing significantly if we include other metrics, in this case ROI impacts 2-5 as listed in the chart below.
But what about production losses or unplanned downtime events?
The adoption of IIoT in Digital Transformation strategies to support predictive maintenance processes that mitigates or eliminates production losses and unplanned shutdowns provides another significant improvement in ROI as depicted in the graphic below.
While the preceding example was for IIoT solutions, the technique shown is indiscriminate in that the principle of the impact model applies to any Digital ROI calculation that forms a Digital Transformation plan.
A final learning. The choice of technology can have a considerable impact on ROI.
Organisations should not simply select the cheapest technology to boost a short-term ROI calculation. Spending extra on an application that, for example, delivers larger data and analytic capabilities and/or easier communication and installation choices may be better overall. While the initial cost may be higher, the ongoing expenses will be reduced, strengthening the ROI over time and delivering a better outcome for the organisation.
Fundamentally, determining the ROI of elements or of your entire Digital Transformation strategy does not have to be complex; it simply needs to be organised to include both direct and indirect impacts. A well-executed ROI analysis serves as the ideal road map for a Digital Transformation plan, providing real knowledge to aid decision making in support of successful results.
Let us know your thoughts?
We are eager to understand your Digital Transformation ROI and whether our experience concurs with yours.
This article was written on behalf of Miniotec by Tony Nitchov. (connect on LinkedIn).
* “Accelerating the Internet of Things Timeline”, Harvard Business Review Pulse Survey, 2021