How to Measure and Improve Digital Transformation ROI

Digital transformation is a term used by many businesses to describe the use of digital technologies to improve operations and workflows. Digital transformation efforts can improve productivity and how the business operates, and even increase profitability.

But like with any investment, it’s important to understand and be able to measure the ROI of digital business transformation. This can ensure your company is making the right investments to gain a competitive advantage.

Today, we’ll look at how you and your organization can measure and improve a digital transformation project's return on investment (ROI). Often, digital transformation projects are costly exercises, and sometimes the cost savings are not always as apparent as they should be. With the information you get from this article, you’ll see how to check the ROI of your next digital transformation project.

What is digital transformation? 

Defining digital transformation is not an easy task, but to accurately measure it for your organization, you need to know what it is.

A quick search in your favorite search engine might yield results like:

• Oracle: “..digital transformation makes it possible to reimagine how you use your technology, people, and processes to move your business forward in new ways.”
• Salesforce: “Digital transformation is the process of using digital technologies to create new — or modify existing — business processes, culture, and customer experiences to meet changing business and market requirements.”
• CIO Magazine: “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.”

Whilst these all answer the question, a better definition, which we like to use, is this one:

 Digital Transformation is a continuous realignment of electronically stored data and related processes to maximize business outcomes.

As you can see, digital transformation efforts can be any number of things. Defining what this means for your business strategy is the first step in determining the ROI of your digital transformation investment. For more on defining what a digital transformation is, take a look at this article.

How do you measure ROI in digital transformation?

Finding digital transformation ROI is all about costs and potential savings or profits. Here are some things to keep in mind when measuring the ROI of your business’s digital transformation initiatives.

Traditional on-premise systems may have costs incurred due to:

• Hardware costs (of the servers, network switches, cables, storage and so on)
• Software costs (operating system, licensing and maintenance of the application itself)
• Associated software costs (many systems require an extensive, high-performance database, which will have its own software costs – and possibly hardware too!)
• Employee costs (to run the systems, which also include expensive training requirements depending on the application)

There are also more difficult to assess costs such as:

• Part of your overall data center costs to host the systems
• Backup software, hardware and storage costs to backup the system
• Training costs for the employees who look after the systems
• Power, cooling, lighting and so on

Essentially what we’re saying is there is more to the cost of owning a system than the licensing / maintenance costs of the application itself. In many organizations, that might only be a small part of the overall costs of owning and running an application or system.

So, to measure the return on investment of performing a digital transformation, you and your organization need to first understand the costs of the existing system.

As described above, you may need to dig into the individual costs to understand the overall cost fully. Next, you need to repeat the exercise to assess the costs of the new system. Finally, there will be a cost associated with performing the digital transformation.

Let’s look at each of these in turn and how they affect digital transformation ROI:

Existing Costs

As mentioned in the previous section, costs of the existing system might include the following:

• Hardware costs (of the servers, network switches, cables, storage and so on)
• Software costs (operating system, licensing and maintenance of the application itself)
• Associated software costs (many systems require an extensive, high-performance database, which will have its own software costs – and possibly hardware too!)
• Employee costs (to run the systems, which also includes expensive training requirements depending on the application)

Future Costs

The future costs of many digital transformation projects can entice organizations, large and small, to perform the change to a new system. But take care to consider:

• Hardware costs (if moving to a cloud-based application, these might be very close to zero)
• Software costs (licensing and maintenance of the application itself)
• Associated software costs (if you are migrating to a cloud-based application, these might be very close to zero. If you are migrating to a different ‘physical’ software solution, these costs could still be considerable)
• Employee costs (to run the new system. This too might involve expensive training requirements. However, hopefully, a cloud-based application solution will dramatically reduce this cost)

Digital Transformation Costs

The costs in this section vary from project to project. Typically, you will have costs relating to:

• The employees on the project team, either full-time or part-time commitment to create a data driven culture.
• Software / Hardware. These are the costs related to any migration or transformation software used during the project. This can be dramatically lessened if the chosen product is cloud computing native, like our cloud migration

The Bottom Line

To assess the ROI of digital business transformation, you can use each of these three costs and plot them over a series of years and (importantly) compare that with the cost of doing nothing and continuing to use the existing system (which will probably incur increasing costs year on year).

What are the three types of ROI from digital transformation projects?

There are many goals that can be associated with a digital transformation project. Still, when it comes to the return on investment of a digital culture, many enterprise organizations are looking for these three types of return:

Reduce hardware costs

Often digital transformation projects involve migrating data from an on-premise system to a cloud-based or a cloud native system. This will obviously reduce the hardware costs associated with running and maintaining an on-premise, complex software application and its associated databases and storage.

When considering this type of cost-saving, remember that the hardware costs of some of the associated systems might be shared amongst applications (such as a shared Microsoft SQL Server), so the cost might not be eliminated even when the digital transformation project is complete.

Reduce software costs

Licensing costs, operating system costs, costs of backup software and so on for on-premise systems can consume a large budget very quickly. Moving to a new system, cloud-based, cloud-native, or even on-premise, should help your organization reduce the software costs of performing the business function. Certainly, if your organization moves an application from an on-premise system to a cloud-based system, you can expect some significant savings, though it’s worth pointing out that some SaaS applications do have considerable per-user charges.

Reduce employee costs

In this category are the costs associated with the employees maintaining a particular system. These employees might not be pushed out of the organization; instead, they can be used in other more productive projects and tasks. Ultimately the part of their time consuming with maintaining the old system is freed up.

How is technology ROI measured?

As discussed in this blog, there are a few factors to consider:

• The overall cost of the existing system
• The cost of performing the digital transformation
• The cost of the new system

In many situations that we’ve encountered, organizations have achieved a massive return on investment even within the first year or two because the cost of running the original system, when examined closely, was extremely large. Therefore, even taking into account the cost of performing the digital transformation exercise, savings can be made almost immediately!

What are the benefits of digital transformation?

Each organization can benefit from a digital transformation project in many different ways. Benefits can be broad, such as improving efficiency, or as niche as enhancing customer engagement and more.

 Here are a few benefits of digital transformation to consider:

• Data is examined and expired if no longer needed
• Retention periods of data can be reviewed and adjusted
• Information can be made available to more appropriate members of the organization at the required times
• Information can be made available on different devices, making it more accessible to those employees that need it
• Software systems can better communicate with each other (using appropriate APIs) so that business data is used more efficiently throughout the organization
• Reduce the cost of running business applications
• Reduce the training requirements for employees (new hires and existing employees)

How can digital transformation be improved?

By far the most significant way that digital transformation projects can be improved is to pay attention to the return on investment. This starts by fully understanding the existing costs, future costs, and the transformation project costs.

Many large digital transformation projects are deemed failures, or only partially successful because these costs, benefits and savings are not fully understood. It’s almost like additional, unforeseen costs jump out of the project throughout the later phases causing project managers to run for cover as senior management starts to focus on the problems.

Don’t let that happen to your project!

If you and your organization take the appropriate time to understand the current costs, work out the future costs, and add into the mix the costs of the digital transformation project itself, you’ll have a much better chance of performing a successful digital transformation project.

With unmatched next generation migration technology, Cloudficient is revolutionizing the way businesses retire legacy systems and transform their organization into the cloud. Our business constantly remains focused on client needs and creating product offerings that match them. We provide affordable services that are scalable, fast and seamless.

If you would like to learn more about how to bring Cloudficiency to your migration project, visit our website, or contact us.