CHAPTER 10

FOCUSING INVESTMENT

Becoming a Fashionista is easy. Everywhere you look, there are opportunities to invest time, effort, and dollars into making your business more digital. It is all too easy to invest in them all. The siren song of digital technologies is a powerful one and can lead many companies astray. But Digital Masters know their own direction and they stay the course. They focus on the initiatives that will advance their vision and on which the Digital Masters can build existing skills and assets. These initiatives contribute new digital platforms and infrastructure and are the initiatives that Digital Masters can afford to invest in and see a return. Digital Masters have a keen focus on the things that are important and the discipline to disregard those that are not.

Focusing investment is where the rubber meets the road in digital transformation. You will need to commit real money to fund initiatives, you will have to engage real people in making things happen, and you will also need to keep everyone moving in the same direction. Our research shows that many companies struggle to turn vision into reality. In non-masters, 78 percent of respondents said that their senior executives agreed on the importance of digital transformation. But only 40 percent said that their leaders were aligned on how to execute it.¹ So, what does it take?

As you focus your early digital transformation investments, be sure to manage three areas carefully:

• Translating vision into action: Have you converted your digital vision into strategic goals? Have you translated your digital transformation priorities into a roadmap of initial activities?
• Building governance: Have you designed governance mechanisms to steer your transformation in the right direction?
• Funding the transformation: Have you designed a balanced portfolio of digital investments? Have you worked out the funding mechanisms for your transformation?

FIGURE 10.1

The digital transformation compass: focusing investment

HAVE YOU TRANSLATED YOUR VISION INTO ACTION?

Translating your vision into a focused set of goals and initiatives is the key starting point for implementing your digital transformation. You and your team will have crafted a vision of your digitally transformed company: what your company will stand for, how it will operate, and what you need to do to get there—or partly there. That vision should start highlighting some of the major landmarks on your digital transformation journey—how you improve the customer experience, how you increase your operational performance, and how you adapt your business model. The astute investments in digital capabilities—the what of digital transformation—have already been described in part I of the book. But how do you turn vision into action?

Digital Masters first translate their vision into strategic goals that point to what an achieved vision would look like. Second, they build a roadmap of initiatives—a roadmap that starts guiding the organization toward the vision.

Define What Good Looks Like

Translate your digital vision into top-down strategic goals that point to what an achieved vision would look like. Articulate top-level goals only. Specific KPIs will come later, once you have a detailed program. For example, “By 2016, two-thirds of our customer contacts will come from digital channels.” Or “Digital sales will represent 60 percent of our total revenue in four years.” Or “In two years, we will have straight-through processing of our claims, without manual interventions.”

Make sure your goals reflect what you are trying to achieve in a balanced way. Your goals should not just be about financials, but should also be expressed in terms of customer experience and operations as well as the organizational capabilities you need to build. This strategic scorecard will provide a basic template for your entire digital transformation efforts.

There are several tools and methods available to help you construct and manage this scorecard, such as the balanced scorecard methodology.² Many business management software tools can also help you automate the process. But the key is to create enough time with your top team to design and manage a scorecard that truly reflects what “good” will look like once your vision becomes reality. Of course, you will need to iterate and sometimes correct your course. But just like a traditional compass, the scorecard will provide a point of reference with which to navigate your digital transformation.

Build a Roadmap for Your Digital Journey

In a perfect world, your digital transformation would deliver an unmatched customer experience, enjoy the industry’s most efficient operations, and spawn innovative, new business models. There are myriad opportunities for digital technology to improve your business, and no company can entertain them all at once. The reality of limited resources, limited attention spans, and limited capacity for change will force focused choices. This is the aim of your roadmap.

Find Your Entry Point

Many companies have come to realize that before they can create a wholesale change within their organization, they have to find an entry point that will begin shifting the needle. How? They start by building a roadmap that leverages existing assets and capabilities, as we discussed in chapter 9. Burberry, for example, enjoyed a globally recognized brand and a fleet of flagship retail locations around the world. The company started by revitalizing its brand and customer experience in stores and online. Others, like Codelco, began with the core operational processes of their business. Caesars Entertainment combined strong capabilities in analytics with a culture of customer service to deliver a highly personalized guest experience. There is no single right way to start your digital transformation. What matters is that you find the existing capability—your sweet spot—that will get your company off the starting blocks.

Once your initial focus is clear, you can start designing your transformation roadmap. Which investments and activities are necessary to close the gap to your vision? What is predictable, and what isn’t? What is the timing and scheduling of each initiative? What are the dependencies between them? What organizational resources, such as analytics skills, are required?

Engage Practitioners Early in the Design

Designing your roadmap will require input from a broad set of stakeholders. Rather than limit the discussions to the top team, engage the operational specialists who bring an on-the-ground perspective. This will minimize the traditional vision-to-execution gap.³ You can crowd-source the design, as we showed in chapter 6 with Pernod Ricard. Or you can use facilitated workshops, such as “digital days,” as an effective way to capture and distill the priorities and information you will need to consider. We’ve seen several Digital Masters do both.

Make no mistake; designing your roadmap will take time, effort, and multiple iterations. But you will find it a valuable exercise. It forces agreement on priorities and helps align senior management and the people tasked to execute the program. Your roadmap will become more than just a document. If executed well, it can be the canvas of the transformation itself. Because your roadmap is a living document, it will evolve as your implementation progresses.

Design for Business Outcome, Not Technology

Technology for its own sake is a common trap. Don’t build your roadmap as a series of technology projects. Technology is only part of the story in digital transformation and often the least challenging one. For example, we described in chapter 6 how the major hurdles for Enterprise 2.0 platforms are not technical. Deploying the platforms is relatively straightforward, and today’s solutions are mature. The challenge lies in changing user behavior—encouraging adoption and sustaining engagement in the activities the platform is meant to enable.

Express your transformation roadmap in terms of business outcomes. For example, “Establish a 360-degree understanding of our customers.” Build into your roadmap the many facets of organizational change that your transformation will require: customer experience, operational processes, employee ways of working, organization, culture, communication—the list goes on. This is why contributions from a wide variety of stakeholders are so critical.

Think a Series of Sprints, not Marathons

The digital world moves quickly. The rapid pace of technology innovation today does not lend itself to multiyear planning and waterfall development methods common in the ERP era. Markets change, new technologies become mainstream, and disruptive entrants begin courting your customers. Your roadmap will need to be nimble enough to recognize these changes, adapt for them, and course-correct.

To design an agile transformation, borrow an approach that has become common among today’s leading software companies.⁴ Keep people committed to the end goal, but pace your initiatives as short sprints of effort. Create prototype solutions, and experiment with new technologies or approaches. Evaluate the results, and incorporate the results into your evolving roadmap. Adam Brotman, Starbucks CDO, explained the iterative process: “We didn’t have all the answers, but we started thinking about other things we could do … I think it worked to not go too far, too fast, but to keep a vision in mind and keep building on successes along the way.”⁵

This test-and-learn approach will require some new ways of working in its own right, but it enjoys some distinct advantages. By market-testing ideas quickly before they go to scale, this approach saves time and money. Its short cycle times also make it more adaptive to external changes. Finally, it enables your transformation to sustain momentum through small, incremental successes, rather the big-bang approach of long-term programs. However, as we described in chapter 8, some efforts, such as your technology platform, are large enough that they need a more traditional approach to understanding requirements and delivering capabilities.

Put Dollar Signs on Your Journey

You need initiative-based business cases that establish a clear link from the operational changes in your roadmap to tangible business benefits. You will need to involve employees on the front lines to help validate how operational changes will contribute to strategic goals.

The basic building blocks of a business case for digital initiatives are the same as for any business case. Your team needs to work out the costs, the benefits, and the timing of the return. But digital transformation is still uncharted territory. The cost side of the equation is easier, but benefits can be difficult to quantify, even when, intuitively, they seem crystal clear.

Building a business case for digital initiatives is both an art and a science. With so many unknowns, you’ll need to take a pragmatic approach to investments in light of what you know and what you don’t know.

Start with what you know, where you have most of the information you need to support a robust cost-benefit analysis. A few lessons learned from our Digital Masters can be useful.

Don’t build your business case solely as a series of technology investments. You will miss a big part of the costs. Cost the adoption efforts—digital skill building, organizational change, communication, and training—as well as the deployment of the technology. You won’t realize the full benefits—or possibly any benefits—without them.

Frame the benefits in terms of the business outcomes you want to reach. These outcomes can be the achievement of goals or the fixing of problems—that is, outcomes that drive more customer value, higher revenue, or a better cost position. Then define the tangible business impact and work backward into the levers and metrics that will indicate what “good” looks like. For instance, if one of your investments is supposed to increase digital customer engagement, your outcome might be increasing engagement-to-sales conversion. Then work back into the main metrics that drive this outcome, for example, visits, likes, inquiries, ratings, reorders, and the like.

When the business impact of an initiative is not totally clear, look at companies that have already made similar investments. Your technology vendors can also be a rich, if somewhat biased, source of business cases for some digital investments.

But, whatever you do, some digital investment cases will be trickier to justify, be they investments in emerging technologies or cutting-edge practices. For example, what is the value of gamifying your brands’ social communities? For these types of investment opportunities, experiment with a test-and-learn approach, as we discussed in chapter 8. State your measures of success, run small pilots, evaluate results, and refine your approach. Several useful tools and methods exist, such as hypotheses-driven experiments with control groups, or A/B testing.⁶ The successes (and failures) of small experiments can then become the benefits rationale to invest at greater scale. Whatever the method, use an analytical approach; the quality of your estimated return depends on it.

Translating your vision into strategic goals and building an actionable roadmap is the first step in focusing your investment. It will galvanize the organization into action. But if you needed to be an architect to develop your vision, you need to become a plumber to develop your roadmap. Be prepared to get your hands dirty.

HAVE YOU CHOSEN THE RIGHT GOVERNANCE MODEL?

Defining your strategic goals and your implementation roadmap will help you get everyone focused on the digital priorities—the priorities you have selected for the positive impact they will have on your customer experience or operations. Roadmaps help with the what of digital transformation but not with the how—the way you conduct your transformation (discussed in part II). Earlier, we discussed in detail the need to craft a vision and how to do it. Later in the book, we will address how you can mobilize your organization effectively and the need to get IT and the business working in sync. But in this current stage, you need to figure out how you will ensure that everyone keeps moving in the right direction. This is where governance is useful.

Build the Right Governance

One of the major challenges of digital transformation is that there is no single obvious owner of the transformation. Marketing? IT? Operations? Your biggest business unit? In a complex company with many different functions, business units, and geographic areas, who owns the transformation can be a very difficult question to answer. But not answering it is a recipe for failure.

Digital transformation engages a broad, cross-functional set of stakeholders. Once those people are motivated (or once they see a big pot of money available for spending), they’ll start moving in the direction they think is best. That direction may not be what’s best for the company as a whole.

You need to steer the efforts of all of those people in a common direction. And that takes governance. In our research, we have seen that governance is an important driver of the profitability advantage enjoyed by Digital Masters. But our research also showed something else. No single governance model is right for every company. This is no surprise, because research over many years has failed to find the single best governance model for IT across all companies. Digital governance is, if anything, even more complex than IT governance.

As we discussed in chapter 7, digital governance focuses on two clear goals—coordination and sharing—whatever your company is. And there are some common mechanisms to help you make it work. In creating your digital governance model, you’ll need to decide what you want to coordinate and share. Then you’ll need to figure out how to make it happen in your company. Finally, you’ll need ways to know when to adjust your governance over time.

Decide What You Need to Coordinate and Share

Start by identifying the behaviors you want to encourage or discourage. What do you want to coordinate across the company? What do you want to share? Consider all of the investments, resources, and activities in your roadmap.

First, ask yourself, “What resources should we be sharing or coordinating across groups?” Sharing resources like digital technology platforms, talent, data, or other digital assets can offer economies of scale. However, sharing requires extra effort to ensure that the resources meet the needs of the groups that are sharing them. You might choose instead to allow some resources to exist in each business unit, but coordinate their activities. And some may work perfectly well without coordination, at least in the short term.

A second question to ask is, “What initiatives should be shared or coordinated across the company?” Should you take on a single social media strategy for all your company’s products or allow each brand to design its own? If each brand designs its own, should the brands coordinate their technologies or vendors? Should they work with common standards? Should they develop interfaces so they can work together?

Research shows that centralized control of a standardized platform can provide both efficiency and agility simultaneously.⁷ Conversely, too much autonomy can lead to spaghetti, which reduces efficiency, creates risk, and decreases agility.⁸

Standardized systems and processes can provide economies of scale to all units, while allowing each unit to build extensions on top. For example, the Caesars online platform is standardized, allowing the company to manage it efficiently and to easily make changes that affect all units. But employees in each hotel can customize their websites’ style, information, and marketing campaigns and can even build extensions on top of the platform to meet local needs.⁹

Also be sure that your choices of sharing and coordination do not stifle innovation. You want to build economies of scale and drive out unnecessary complexity, but you also want to allow business units some leeway to find new ways of working. Your processes can make exceptions to allow experiments to happen, or possibly even seed innovative activities.

Finally, consider whether sharing and coordination should be mandatory or optional and at what level of the firm. P&G prides itself on the entrepreneurial autonomy of its business units, but mandates strict coordination and sharing of processes such as finance and HR. Meanwhile, business unit leaders can opt in to other services such as innovation and brand management if they feel doing so would benefit them.¹⁰

Choose Mechanisms to Meet Those Goals

Some of the coordination and sharing you desire will occur naturally as part of the way your company works. But much of it won’t. The design of your organization may lead to unwanted behaviors. Some units will optimize for their own needs instead of the company’s needs. Others will follow the standard way of working without thinking about how to innovate it. Still others will shut down innovation in a too-intense desire to standardize.

If governance is not someone’s job, it won’t happen. For example, Adam Brotman of Starbucks, explained: “Before the CDO position was created, my job was web, mobile and social media … [I]t wasn’t global digital marketing, it wasn’t card [Starbucks Cards and mobile payments], and it wasn’t loyalty. Those were in three different groups separately in the organization. We realized those were all one thing, they all work best together and if you listed the vision for where we wanted to go with digital, it was encompassing all those things.”¹¹

Chapter 7 highlighted in detail several mechanisms you can use to make governance happen. To design your digital governance model, select the mix of mechanisms that will encourage the right behaviors in your organization.

Governance Committees

These bodies are the simplest to implement. However, because they are no one’s “day job,” committees are limited in what they can accomplish. Committees can be a useful starting point, but usually need to evolve to another mechanism.

Digital Leadership Roles

No major change effort happens without someone in charge. Many companies make digital transformation someone’s day job by naming a chief digital officer (CDO) or an equivalent role. Unless you just want light coordination, you need to give teeth to the digital leader role by appointing a senior executive. Who that executive reports to, and what authority he or she has, matters a great deal. The executive’s network of informal contacts can also be very helpful. Also consider how you can use formal liaison roles to help drive the change across your organization.

Shared Digital Units

These groups are effectively shared service units for the digital age. Rather than trying to bridge the gaps in the digital activities of IT, marketing, and other groups, shared digital units allow you to integrate their activities into a single group. These units are typically stand-alone and manage their own budget and resources. Shared units can act as a powerful accelerator for your transformation. But they are the most resource-intensive of all the mechanisms.

Plan to Evolve Your Governance Model

If no single governance model is right for every organization, another point holds true too. No governance model is right forever. As your digital capabilities improve, and as your governance models take hold, you’ll find that you need to make some adjustments.

Pay attention to the coordination and sharing behaviors that you want to encourage. How well is your governance model making them happen? As business units learn that shared digital resources work well, you may be able to relax some of your more heavy-handed enforcement mechanisms. You might devolve centralized skills and initiatives to key business units. On the other hand, you might want to go the other way, expanding the role of your digital unit to drive even more sharing and coordination or launch new digital products.

Also pay attention to the negative consequences of your governance model. Are small business units getting enough attention? Are your governance processes too bureaucratic? Are your standards squeezing out innovative ideas that might be useful? Is a decentralized approach preventing you from sharing some practices developed by different business units?

Finally, think about your digital leaders. Do you need to augment your steering committee with a full-time CDO to drive changes in culture and governance process? If the organization is starting to adopt the right behaviors naturally, should you evolve the role of the CDO from strong governance toward something different—maybe driving innovation? Do you still need a strong enterprise-level CDO, or can unit-level CDOs work with a committee or shared unit to drive the coordination and synergy you need?

No governance model is perfect; they all need tuning. And over time, they will all need to evolve as you work to drive new behaviors and use your resources most effectively.

DO YOU HAVE THE FUNDING MODELS FOR YOUR TRANSFORMATION?

Digital transformation might be a strategic opportunity for your company or, sometimes, it may be a response to a burning platform. Regardless, the transformation will always need serious investment. You and your team have defined your strategic goals and the financial justification for your roadmap. Now, you need to build a balanced view between long-term capability building and short-term return. You also need clarity on the sources of funding. Finally, you need to ensure that the metrics used for your transformation make sense up and down the organization.

Manage Your Digital Investment Portfolio

You need to build an investment portfolio that balances the goals of your vision with the desired combination of short- and long-term pay off. A wide body of research covers IT portfolio management principles and classifies technology investments.¹² In our research, we have consistently observed four broad types of digital investments.

Foundational Investments

Foundational investments are the table stakes for the strategic success of your transformation. Without them, you may find it can become difficult to make any scalable progress at all. They are the core systems, platforms, or tools that you need to enable advances in digital customer experience or operations. Often, these investments are too costly, or their benefits too distributed, to be absorbed by one unit’s P&L (profit and loss) alone.

A large global company, for example, invested in a global content-management platform to unify the flow of content between its diverse business units. None of the business units could justify the benefits on their own; the benefits were at the corporate level, including an aggregate of smaller returns in each business. The company’s CEO understood that this investment was on the critical path of his company’s transformation. Rather than build the business case for each unit separately, he made an executive decision to invest in the new platform.

Foundational investments do not lend themselves to detailed benefits cases. They require a leadership call. Hence, they are often funded centrally.

Maintenance Investments

Although maintenance investments do not help advance your digital capabilities, they are nevertheless essential to keeping the business running or minimizing risk. They may also be driven by external factors, such as regulatory and compliance requirements. Upgrading website functionalities, providing compliance analytics to regulators, or funding security applications would fall in this category.

ROI-Driven Investments

ROI-driven investments are tightly linked to your transformation roadmap. They are usually project-based with a clear line of sight to KPI improvements and ROI targets. These investments are generally managed within the normal financial planning cycle of your organization but may come from a separate digital fund or account.

Early-Stage Innovation Investments

By definition, early-stage investments are more speculative and their returns are highly variable. For example, these investments can fund incubators, digital labs, research partnerships, or specific experiments. Manage these as if you were a venture capitalist: select the most promising projects, kill losers early, and maximize the commercial value of winners.

Manage a portfolio that balances long-term capability building with short-term ROI. To start, map out the percentages that you currently allocate to each category. Then discuss with your team what the optimum balance needs to be to accelerate your digital transition. Often, investments in digital transformation are an easier sell when they are budget-neutral or generate at least as much value as they consume. Consider using cost savings from industrializing IT to fund other digital initiatives in the portfolio, such as those focused on building new capabilities or developing innovative new products. In other words, squeeze the old to fund the new.

Exploit Various Funding Mechanisms

Assuming your company is like most, you will have more demand for financing your digital transformation than funds available. The trick here is to diversify your sources of funding. There are many funding mechanisms available, but most fall into one of three basic models: central, local, and partner-supported.

Central Investments

Your company may need to make central investments when the services provided are owned by a central function or when you need to coordinate between entities, to leverage the investment. This will often be the case for your foundational digital investments. Central investments can also be used to fund your innovation—such as seed funds or incubators.

Local Investments

When projects within your roadmap are directly benefiting specific parts of the business, local investments work best. An example may be an e-commerce application for one of your brands. You need to ensure that, when possible, you leverage locally funded implementations across the wider business. If the potential for enterprise-wide leverage is substantial, you can offer a central subsidy for a local effort. Or, you can pay a royalty fee back to the unit in an app-store type of model when the application is used by others.

Partner-Supported Investments

Partner-supported investments come in several flavors. You can get a partner to support an initial investment in exchange for a minimum service volume and duration commitment. You can ask your partner for performance-based investments. You can sell or lease assets (physical or IP) to a partner to fund new investments. Or, if your partner is launching new technologies, you can act as a showcase pilot for their marketing in exchange for a substantially reduced investment.¹³

Don’t Let Transformation Goals Get Lost in Translation

Executives speak the language of strategy, cost, and revenue. Employees on the front lines speak the language of product, work flow, and click-throughs. A survey by CFO Research Services found that only 36 percent of finance executives agree that the metrics they use to assess technology investment are commonly understood across the company.¹⁴ Clearly, something is lost in translation between strategic measures of success and operational KPIs.

That translation also needs to work both ways. Senior leaders need to understand how operational improvements drive real business performance. As one high-tech executive said, “When the marketing guys came up with their click-through rate, cost-per-thousand impressions, and sentiment-analysis metrics to justify their investment, I could tell that the whole board had no clue what they were talking about. The outcome became obvious.”

Strategic goals need to be understood in terms that make sense to on-the-ground employees. Likewise, operational and customer experience improvements must be translated into financial benefits that can be tracked and understood at senior levels. But as a senior leader, your role is to ensure that both groups speak a common language when developing the investment and funding case for your transformation.¹⁵

DO YOU HAVE A SHARP FOCUS?

Success in digital transformation is as much about what you don’t do as what you do. In the context of so many opportunities to digitize your business, it’s easy to become distracted by the latest shiny object. But when it comes to making real strategic commitments, investing real dollars, and involving real people, only a focused approach to digital transformation delivers real business value.

Play to your strengths. Leverage existing assets and capabilities to build your roadmap. Build governance mechanisms to steer the transformation and maximize its return. Be clear about your funding models. These steps are critical to turn your vision into action. The next step is to mobilize your organization to make it happen. In chapter 11, we’ll show you how to do it.

So what’s new about focusing investment in the digital world? You need to design an agile transformation roadmap to cope with the velocity of digital change. You may need to appoint a person to serve as chief digital officer. Since different units, such as marketing, may be more willing to fund digital efforts on their own, coordination is even more important than for other technology investments.

HOW WELL HAS YOUR ORGANIZATION FOCUSED ITS INVESTMENT?

Table 10.1 summarizes how you can focus investment in three key steps. Look at the central questions at each step, and give an honest assessment of your company’s progress on a scale from 1 to 7 (1 = strongly disagree; 4 = neutral; 7 = strongly agree). For each of the three steps, total your scores across the individual questions.

For each step, we have provided you with a target that places you among the Digital Masters. We’ve also provided a threshold below which you should start taking action now to improve your situation. If your score is in the Digital Master range, you are ready to move on. If your score is in the middle range, reflect on why. Your team still needs to work out a few things in the investment-focusing phase. If your score is in the lower range, it is time for remedial actions. If it is well below, we recommend you start now to fundamentally rethink your investment process for digital transformation.

TABLE 10.1

How well has your organization focused its investment?

For each of the three questions, rate your company, using a scale from 1 to 7, where 1 = strongly disagree; 4 = neutral; and 7 = strongly agree, and find the recommended action for your score.

Have you translated your vision into action?	Score
We have a top-down strategic scorecard to guide our transformation.
There is a high-level roadmap for digital transformation.
Our roadmap encompasses all organizational changes required, not just technology changes.
Total score

Scoring: Over 17: your roadmap and scorecard are in good shape—focus on engaging your people in executing; 7–17: review your roadmap and scorecard for content and alignment; less than 7: you need to conduct a full review of your scorecard and roadmap processes.

Have you chosen the right governance model?	Score
Digital initiatives are coordinated across silos such as functions or regions.
We are clear on what needs to be coordinated and what needs to be shared across the enterprise.
Roles and responsibilities for digital initiatives are clearly defined in the company.
Total score

Scoring: Over 15: your governance model is in good shape; 8–15: check governance principles and/or program leadership; less than 8: you need to design or rework your governance principles.

Do you have the funding models for your transformation?	Score
Our business cases and key performance indicators are linked to our roadmap.
We balance our portfolio of digital investments between long-term capability building, short-term return on investment, and experiments.
We have a diversified funding model.
Total score

Scoring: Over 16: your digital funding process is strong; 8–16: ensure that your portfolio, funding, and business case are aligned; less than 8: you need to rework your investment and funding case.