How Do You Really Do It?: Get ROI from digital transformation

Editor’s note: How Do you Really Do It? is a monthly series on Supply Chain Management Review designed to clarify how organizations can adopt common supply chain strategies. The series is authored by Andrew Byer, a former P&G supply chain leader, and Mike Dobslaw, who leads EY’s Supply Chain Planning Practice, and appears on the second Thursday of the month. 

A common supply chain goal is to “digitally transform.” But digital tools cost money, and implementation can be resource-intensive and disruptive. So the goal should more accurately be stated as “to digitally transform in a way that delivers ROI.” But how do you really do it?

First, recognize that any company could choose to spend money on digital tools. Many companies believe that buying and installing tools is a transformation. To truly transform, however, the technology changes need to be broad in scope, not incremental. A related point is that digital transformations are becoming faster and cheaper to implement with the advent of more templatized “turnkey” solutions and AI-enabled lighter, faster technology.

However, spending money is not sufficient to transform. Companies that successfully digitally transform share at least these two factors in common: (1) they have high user adoption of the new digital tools, and (2) users leverage the new capabilities to drive materially improved results. This combination of adoption and improved results is what generates digital transformation ROI. Let’s look a bit deeper at both factors.

Why is adoption important?

If a company invests in new digital capabilities, a key assumption made is that users will adopt the new technology. But this assumption can be flawed. A sober assessment of the current state needs to be completed. Users are under pressure to get their work done, with limited “free time” to train and trial new software. Users are also typically comfortable and familiar with how things are done today. (see note at end of article) Change can be difficult, with some people simply resistant to change. Addressing this part of the user base takes work and reinforcement.

A key first step is confirming the standard work processes are congruent with the new technology, and if the work process is performed, results will improve (either better absolute results or parity results achieved with less effort). For all adjustments needed vs. current work processes, these should be clearly mapped in “as-is” and “to-be” visuals that people can follow. And if the new technology is not delivering better results, a selection or implementation error has occurred. Resources are being invested (dollars, organizational time) for no incremental value—this is negative ROI.

What it takes to deliver ROI

So, my people are adopting the new digital technology. I can relax now, start totaling up the ROI and head out for an early dinner, right? Sorry, no. Adoption is necessary but not sufficient. To get ROI, results must materially improve in a way that offsets the cost of the technology and implementation (people’s time, integration costs and any startup curves of lower capability). But merely offsetting costs is breaking even. To achieve ROI, results must improve in a clear, financially measurable way. This impact can affect either the top line (revenue) or bottom line (profit). For example, changes that enable higher-order fill rates or reduce new product innovation timelines can improve sales (top line). Technology that drives productivity or efficiency can improve profitability by reducing costs (bottom line). These measured results based on the financial metrics impact is how ROI from digital transformation is generated.

Benefits of getting ROI from a digital transformation: The financial benefit of recouping value greater than the investment is clear and obvious. However, there are additional benefits, including:

• Growing the organization’s digital savviness and openness to change. A successful transformation in one area can open the door to improvement in other areas.
• Growing the organization’s ability to successfully change. Change is not easy. Building the muscle memory required to successfully change can be a real boost.
• Improving morale. A successful digital transformation eliminates current work-process defects, removing employee dissatisfiers and enabling saved time to be reinvested in better results. This can directly impact attrition rates and employees’ perception of their company as “an employer of choice.”
• Increased competitiveness. Businesses do not operate in a vacuum. As competitors improve, transformation helps organizations keep up, stay ahead or close the gap.

Watch-outs: Unfortunately, there can be many intended or unintended barriers to achieving ROI from a digital transformation:

• Not achieving adoption or only superficial adoption (users’ fingers on new technology keyboards while defaulting to spreadsheets and transcribing into new systems). This may be caused by culture, change resistance, insufficient user engagement in the business case for change or technology that does not meaningfully improve the current state.
• Not converting adoption into better operational results.
• Not being able to measure operational improvements in a way that translates into financial gains.
• The potential ROI is relatively minor. Businesses operate in a world of choices, including competing investments. Often “hurdle rates” exist that transformations must clear to be worthwhile vs. selecting other potential investments.

Summary: How to get ROI from digital transformation

Many companies talk about digital transformation with the expectation that a clear “proven path” should exist, right? In reality, company starting points, business needs, scope of change and organizational readiness can vary significantly. What is more constant is the truism that digital transformation must involve a marked and significant change from the current state, users need to adopt the new tools and this adoption must drive financially measurable improvements in output results—with gains that more than offset the cost of buying and implementing the technology.

* Note: Some users will be skilled in the current process and tools, including any existing gaps, flaws, losses (extra steps, touches and time) they experience using the current tools. These users will often welcome improved technology as a vehicle to replace current-state defects with more value-added work. This change typically has a positive impact on morale: extra steps and touches are replaced by work that contributes more directly to improved results. If the technology improves their work process and results, these users can become the “change champions” who can show other users the benefits of change vs. the current state.

About the authors

Andrew Byer is a former P&G supply chain leader. Mike Dobslaw leads the EY Supply Chain Planning practice. To learn more about how EY and P&G team to support supply chain transformations, please write to [email protected].

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