During the Covid Pandemic, we saw rapid changes in the way businesses were conducted across the industries and across the globe. The urgency with which digital has been embraced in this time can be attributed to evolving customer preferences due to social distancing requirements, increased competitive pressures and declining business performance due to store lockdowns or other restrictions. Covid has indeed accelerated the pace of digital transformation by several years.
Yet, there are some businesses that are holding back from jumping on the next big digital bandwagon. Possibly, they are being too watchful of any new capital expenditure or are finding comfort in their traditional ways of doing business, in these tough times! Whatever the reasons be – There are potential flip sides to this delay.
This article intends to measure the flip slides of not embarking on the digital transformation journey, with a project management term called ‘cost of delay’. We further go on to explore, whether it can be leveraged to apportion the real-world financial impact of delaying digital transformation? How big can it get? Can there be a potential model to project it for next 3 years or 5 years? etc.
What is the potential cost of delaying your digital transformation journey?
Though digital transformation is a strategic priority for many businesses, there are many challenges businesses face that may cause delays or prevent them from embarking on a digital transformation journey. Internal politics, cultural resistance, lack of the right tools and lack of a formal strategy or plan are the most common factors that delay digital transformation. According to a survey by Information Management magazine 42 percent of respondents said they were behind schedule, or at risk of falling behind, on their most significant digital transformation project.
If the costs of a delay are not tracked properly, there will be problems in quantifying the loss and apportioning liability. While setting up the right cost recording systems around a future system is not always easy, we can follow a broad (excel based) approach to estimate the potential costs of delay:
- On an excel graph, project the gross profits of the business across the next 3-5 years if it continues to grow without leveraging the key digital value drivers (read more on key digital value drivers – in a later section of this article).
- On the same graph, project the gross profits when the business has embarked on a digital transformation journey, loaded with the additional value derived out of the key digital value drivers.
- Calculate the average difference between the two projection lines over these next 12-20 quarters (equivalent to next 3-5 years) to come up with a figure which can be termed as quarterly cost of delay.
Below is an illustrative graph (with dummy data) to showcase the above approach:
Drawing from my personal experience of working on digital transformation value engineering exercises for last 5+ years, where I have used a similar approach to arrive at the quarterly cost of delay for medium to large enterprises. The average value for all the conservative estimates of quarterly cost of delay across the enterprise digital transformation exercises is coming close to $2.1M per quarter.
Below are the quarterly costs of delay shown in a bar graph for past 20 digital transformation value engineering exercises, I have worked on across a mix of industries and geographies in FY’20 and FY’21 – which shows a general upward trend in costs of delay as we are marching forward from past year to this year.
Value drivers from a digital transformation project
There is intrinsic value in embarking on a digital transformation journey. According to Digital Transformation (DX) Technology and Industry Outlook, April 2019 – digitally transformed companies’ annual growth rate in revenue, gross profit and research & development spend far outweighed that of semi-digital and non-digital companies. Which essentially means that digitally transformed companies are not only performing well today but are building up a future-ready competitive advantage against their semi-digital and non-digital peers which will only become harder to equate as time passes.
Circling back to our earlier quest of attempting to identify the key Value Drivers for embarking on a digital transformation journey. We leveraged some studies from IDC FutureScape, to arrive at some broad heads of digital value drivers from multiple perspectives. The value drivers we arrived at are fitting very well into a balance scorecard framework (balance scorecard is a popular strategic planning tool). The KPIs (Key Performance Indicators) mentioned in the balance scorecard table below are at generic level and will have unique flavors as we dive deeper into each individual industry:
We are further expanding on the broad heads of digital value drivers mentioned in the above balance scorecard table, as follows:
- Increased Pie in Platform Economy: Competing in the future for capturing profits that are dependent on controlling or participating in the right platforms (software, infrastructure, and connectivity platforms) by leveraging network effect – so that the organization can expand reach, harness multiplied innovation and build niche ecosystems.
- Improved Learning and Growth: Strengthening the organization’s capacity to learn fueled by AI, Human Resource and Organizational “Learning” culture – so that economies of learning can be leveraged, which has gained almost equal footing to economies of scale and economies of scope.
- Increased Number and Scale of Innovation: Delivering innovations for future enterprises – so that the organization can derive data driven intelligence, yield insights/knowledge by spreading intelligence from the core to the edge, allow testing ground for actions that create value.
- Improved Customer Experience: Catering to the rising demand of the customers – so that the organization can provide more convenience, customization, and control in the hands of customers (of what data is collected and how it is used) and deliver exceptional, personal, relevant, and compelling experiences.
- Accelerated Disruptions and Process Efficiencies: Navigating through the volatile Business Challenges of tomorrow by keeping pace with the business changes – so that the organization can react, adapt, and seize opportunities by being more agile.
- Augmented Capabilities Due to Artificial Intelligence: Building capabilities through AI that requires minimal human intervention – so that the organization can leverage AI’s Opportunity and Implications on varied aspects of people, process, and technology on a routine basis to create value.
Some decision-makers delay digital transformation or spend too much time weighing the pros and cons before embarking on one. This article observes such delay as limiting, not only because it inhibits the current stage competitive advantage but also a loss of opportunity that might unfold as the industry matures in its digital transformation journey.
So next time you experience a delay in your digital transformation project in your organization, do remember that there is a significant loss of not acting right now. Also, remember to conduct a cost-of-delay-analysis so that the loss can be tracked properly, and liability apportioned.