Investing in digital requires an exploratory approach towards generating ideas to either meet the most prioritised digital threats or to seize the most promising opportunities, combined with strong governance regarding what to scale and how.
Digital investments broadly fall into one of four categories: sustaining, improving, enhancing or transforming (see Exhibit 1). A key reason behind the digital pitfalls is that most companies are set up to manage sustaining and improving investments. Investment frameworks are geared towards certainty – primarily using business case rigour but also due to legacy budgeting and funding mechanisms. Digital insurgencies are often a response to an overly bureaucratic, business case-driven project investment process. Simply because these processes value forecast certainty. Digital chaos often arises following distributed budget control and the lack of a common vision. The digital plan is either a follow-up to the digital chaos to retake central control or a result of the combination of a digital vision and a bureaucratic investment framework.
To succeed with digital transformation, companies need a different approach. Enhancing and transformative investments are uncertain from a time, cost and effect perspective. This does not mean that rigour should not apply, but the process for initial fund allocation and monitoring needs to be adapted to fit an exploratory approach. Or to continue the analogy: gold-digging expeditions must be financed and steered in a specific direction. The direction of the exploration needs to be set from the start by focusing in on the most prioritised areas, whether they are threats or opportunities. Investment decisions need to be strategic, and they need to be governed.
Exhibit 1: Four categories of digital investments
- Sustaining investments are ‘required to play’, either because of industry development or compliance. These include functionality that customers have come to expect as baseline for the industry, such as a sufficient level of self-service for example (2). They also include efforts to stay compliant (1) with new rules and regulations. Digital investments in this category are often characterised by a low level of uncertainty and their business cases are seldom financially attractive in themselves as they are ‘required to play’.
- Improvement investments improves attractiveness, efficiency or effectiveness in the delivery processes for, or the customer experience of, current services or products. These investments typically target things like digitisation of high-labour activities (3) or revamping existing digital channels (4). They typically have limited transformative effect and can, when scoped, become well-defined.
- Enhancing investments are investments that significantly change ways of working or the customer experience. These are investments that have significant impact through for example the automation of processes (5) or by opening up a new complementary revenue stream from existing services and products (6) such as offering a subscription-based service concept as complement to an existing product.
- Transformative investments are business-critical investments that form the basis for future success by transforming the value chain or the company’s offerings. They are investments that have profound impact on the company’s business model as they significantly impact both internal operations and customer experiences. These are investments that redefine the company at its core.
In 3gamma’s experience, most digital initiatives are focused on sustaining and improving current operations. Many organisations are investing heavily in replacing legacy systems and renovating the core. By taking a portfolio view of ongoing and planned initiatives a company can gain valuable insight into the ambition of its digital transformation programme. Most digital transformation programmes are not transformative; they are merely applying technology to sustain or improve current business. A key reason for this is how companies approach investment decisions – any idea brought forward should have a solid cost or revenue case, be aligned with target operating and IT architecture and be executable within current resource/competence constraints. Most companies incorporate all these three criteria in early stage toll gate decisions.
A portfolio of digital initiatives tends to resemble the portfolio in figure 1 – a programme geared towards continuous improvement and compliance. Most digital transformation project portfolios are primarily geared towards sustaining current operations.
Figure 1: Illustrative digital transformation portfolio geared towards continuous improvement
An effective way of working with early stage exploration is the creation and management of digital use-cases. Digital use cases are scenarios that describe how to reach the goal of improving a digital dimension – closing the gap between where the business is now and where it needs to be. The digital use-cases become the basis for maintaining a strategic portfolio view of a digital transformation.
Investment framework for digital explorations: applying adaptive rigour and providing strategic prioritisation
Volatility, uncertainty, complexity and ambiguity cannot be approached with either one-off activities or pre-planned programmes. In a recent 3gamma Insight, we introduced the concept directional strategy. The directional strategy is fundamentally designed for explorative management of VUCA conditions, as this requires companies to adapt an exploratory approach set in the context of a structured framework for assessment, prioritisation, funding and delivery. For enhancing and transformative digital investments, a corresponding investment framework is needed.
Certain critical components are required to enable transformative investments: increased flexibility in budgeting, new early stage funding mechanisms, a revised approach to investment screening and a supplemental governance process.
- Create a cost-out culture: Break the self-fulfilling prophecy of budget spend and adopt for example zero-based budgeting to drive a strong cost-out culture and free up funds for transformation. Ensure there is a clear present need for current cost base, reduce budget inflation, identify and eliminate waste and delegate authority to create a sense of ownership in the organisation. Companies need to efficiently transform current operations, not build digital stand-alone solutions on the side.
- Allocate exploration funding: For early stage funding, move from yearly up-front project allocation of funds to ‘exploration allocation’ and ‘scaling funds’ which can be allocated to initiatives in the project portfolio flexibly based on potential and progress. It will also force lean thinking and a start-up mind-set in the organisation. Late stage financing can still follow legacy funding mechanisms. Exploration allocation follows a zero-based budgeting approach allowing the organisation to aggressively pursue strategic opportunities without up-front yearly determinism.
- Adopt adaptive screening: For investment screening, move from a formal business-case driven process focused on uncertainty-reduction to a portfolio-based view focused on balancing sustaining, improvement, enhancing and transformative investments. Balance the allocation of exploration funds in the portfolio in line with strategic ambition. Reduce scrutiny for high potential/high uncertainty investments, but use a stringent fund allocation model aligned with a start small/scale fast mindset to emphasise lean and aggressive time to value realisation.
- Establish iterative executive board reviews: Iterative senior executive board reviews and learnings for all early stage and scaling stage initiatives from a financial, solution, potential and change perspective, preferably with a tangible demo or proof of concept. Establish a structure with more strategic governance with empowered, hands-on senior decision-making in close relation to the initiatives. Avoid low-frequency disconnected governance.
Depending on industry context, ambition, digital maturity and company size, the organisational setting for digital transformation needs to be carefully considered. In many organisations, especially for companies wishing to propel the digitisation, a CDO should be tasked with overseeing the exploration funds, managing the digital portfolio and chairing the senior executive review board. This will drastically improve the focus and return of a digital transformation programme as it would clarify the boundaries and interface to the CIO and other CxO roles.