How to Set Performance Indicators to Measure Return on Digital Transformation

A well-defined set of measurement for digital transformation should contain a good mix of the long-term strategic measures along with the short-term operational measures.

Change is inevitable, and the speed of change is increasing. The digital transformation is now spreading rapidly to enable organizations of all shapes and sizes to reinvent themselves, but it is the thorny journey with many bumps and curves on the way. How do you measure return on digital transformation in order to make the timely adjustment and improve its success rate? A well-defined set of measurement for digital transformation should contain a good mix of outcome measures or the long-term strategic value along with performance drivers to track the progress in the short term (operational measures). The performance indicators for the digital transformation could include:

Return on strategy execution capability and capacity: Digital transformation is now affecting all aspects of business operations from innovation within and around the business ecosystem, to customer engagement, to business models and processes. Hence, the ROI performance management should take into account both financial and non-financial measures, assessing internal improvements, past outcomes and ongoing requirements as indications of future performance. In this regard, a Balanced scorecard offers a way for a corporation to gain a wider perspective on its strategic decisions by considering the impact on finances, customers, internal processes and employee satisfaction.  In spite of capturing multiple business perspectives, the balanced scorecard must still retain a strong emphasis on financial outcomes. A well-defined scorecard should contain a good mix of outcome measures (or long-term strategic value) along with performance drivers to track the progress in the short term (operational value). If the measurement result shows that the strategy is not moving forward as desired, an organization has a cleaner structure to traverse in an attempt to identify the root cause and take mitigating actions.

Return on Innovation: Innovation is the core business capability of digital organizations. Hence, it’s important to set guidelines for developing a customized suite of innovation metrics. Select the few (3-5) KPIs, to keep the measures simple and understandable. Some choose innovation process KPIs, process KPIs could link to the digital strategy management performance, to make the progress on the percentage of projects in the total innovation portfolio which contained a major part of external innovation. The innovation metrics in the context of business impact include such as % of revenue from new products/services introduced. You could also change the variables and create something like % of the profit from new ideas implemented. The goal of the innovation measurement is to create new revenue and drive early success to create a positive spiral. Measure failures as well. Some say each successful innovation needs, at least, nine failures. If the organization allows these reasonable failures, not repetitive mistakes, it will be more successful in innovation! You choose the right set of KPIs by deciding which are seen as critical to making the trackable progress in order to deliver more innovations. The fewer the better, but they have to be credible and relevant also in the eyes of the stakeholders.

Return on customer-centricity: Forward-looking organizations strive to become customer-centric digital businesses. Thus, it is important to set metrics to clarify the plan of customer-centric process implementation, control and measures, such as How many processes or customer touch points are included, how many staff people are involved, what are company internal performance versus customer experience (their expectations/ satisfaction)? Is it possible to measure it at each touch point? What activities can be done to improve processes to save time and money? Net Promoter Score (NPS measures the willingness of customers to recommend a company's products or services to others) is the closest thing for leadership teams who want to see a link between customer experience and strategy management. NPS, if properly executed, can deliver valuable input. NPS also measures success in terms of Customer Equity. Customer Equity looks at the lifetime value of customers, the cost to attract new customers and the cost to retain customers over a given outlook period.

Return on Risk management: The increasing speed of changes and overwhelming growth of information bring both opportunities and risks to businesses. Organizations that are able to flex the risk-reward balance predominantly through being risk aware more effectively can achieve the digital strategy and build the competitive advantage because they are better placed to walk away from high-risk situations or possibly transfer risk to lower cost. The point is that they are more risk-conscious and, therefore, they are able to make more informed decisions. The bottom line of return on investment (ROI) should be achieved and can be measured if there is a marked improvement in reducing/streamlining the processes, and managing the risks to an acceptable level by the enterprise management oversight. Often the real return on investment doesn't occur until you reach the "pro-active" features, which reduce cost and increased impact on the enterprise. Those would be some of the areas being considered successful. The most commonly used dimensions to measure risk management consist of:

-Strategic: Risk & compliance posture, risk enabled decision-making, etc.

-Financial: Reduced cost of risk & compliance, improved bottom-line, value to stakeholders, etc.

-Operational: Operational efficiency, program visibility, reduced turn-around-time.

-Regulatory: Reduced audit failures, predictive compliance, the ability for early diagnose of non-compliance, etc.

Return on employee engagement: Digital is the era of people. Generally speaking, there are two types of measurement of employee engagement: The first type of measurement of employee engagement in the workplace is through the outcomes of productivity or creativity. What value have those new things designed and implemented (products, services, processes, business models) brought to customers or users? The second type of assessment is through the performance drivers, the elements that enhance an organization's execution capacity. The metrics for talent management improvement include engagement, cost control, return on incentives, recruiting efficiency, speed in revising performance objectives, clarity of organizational structure, the depth of backups in succession plans, the culture of creativity measurement. By tracking these measures, you can focus on where targets are not being met that support planned revenue and profit levels, and what actions might be taken to improve at the individual, functional, and corporate levels.

Return on digital maturity and measurement: Digital transformation extends to every direction of business management. Which management metrics should you apply to measure organizational overall health and maturity? Who and what tools are being applied to measure business performance? Historically, performance measurement systems for most businesses have been financing driven. However, in many business situations, financial indicators only cover part of the story. The effective measurements selected should be part of a link to cause-and-effect relationships, ending in financial objectives that ultimately affect the growth and long-term perspective of the organization. A KPI must last while the process it is measuring lasts. It must be constantly reviewed and improved. Outcome-related KPIs are as relevant as, even become more relevant than process-related KPIs, in order to measure the end to end business performance effectively.

Digital transformation is a journey. Well defining the right set of metrics will never be an easy job, but always keep in mind of the SIMPLICITY principles, and do not confuse the means with the end. Measure the right things, and measure them right, for encouraging positive behaviors, breaking down silo thinking, leveraging trade-offs, to ensure the business as a whole achieving the optimal business result and manage a seamless digital transformation.

Posted in: Digitalization,KPIs