The Challenges of Budgeting for a Transformation to the Digital Enterprise

April 10, 2015 | Posted by Adam Graham

digital-enterprise-transformationIt has been said that not all businesses are digital businesses, but all businesses must soon become digital or risk falling behind the competition. The rush to digital transformation is on, and there is little chance that a trend reversal will occur. 

Technology has always had the power to drive how businesses interact with customers, how they market their products, and how they streamline internal processes. Most advances have built on previous developments, such as the use of factory robotics to enhance existing assembly line methods or local-area networks linking stand-alone PCs to cut costs and improve productivity. Digital initiatives are another way of applying new technology to help achieve a greater revenue production and an increase in profitability.

However, unlike most previous efforts, the transformation to a digital enterprise presents unusual budgeting challenges. The majority of past projects had clearly defined deadlines and objectives. There was a starting point, steps along the way, and a fixed destination. With a digital enterprise, the goal is not a specific destination; the goal is an extended journey. Therein lies the problem.

It is difficult enough to create an accurate budget for a project in which all factors are known. A digital transformation adds a number of unknowns to the budgeting equation.

  • What happens if (when) a technological advance makes current efforts obsolete?
  • When will the costs of adding more of a burden to the IT department be offset by the additional revenue or cost savings promised?
  • How long will the transformation take, and what will determine when the transformation is complete?
  • How much can/should the company invest in the transformation? (This question may be asked in terms of the average cost for moving to a digital enterprise.)
  • How will success be measured?

 

Trying to answer these questions up front is usually a recipe for disaster if the budget is based on these answers and "carved in stone." There must be a great deal of flexibility built into the budget. 

  • If a new technology makes efforts obsolete, the solution will be to embrace the technological advance and leverage it. Ignore it, and you risk losing ground to your competition.
  • As for your return on investment, you can only be certain that your efforts will pay off at some point. Getting a precise fix on a specific date is as difficult as hitting a fast-moving target with a paper airplane during a hurricane. (See the next point to understand why this is true.)
  • The transformation will never be completely finished. Technology advances at such a brisk pace that it is impossible to predict what the future holds beyond the short term meaning there will always be more that you need to do. The additional work may take the form of entirely new initiatives to leverage the power of a game-changing technology, or it may simply be a necessity to upgrade existing apps or methods to accommodate advances.
  • There is no such thing as the "average" cost of a digital transformation. It depends on where you are now, what specific initiatives you need to address, what initiatives you need to prioritize, the size of your operations, and similar factors. As for what you "should" spend, you "should" spend as much as it takes to ensure that your business survives and thrives.
  • If you ask each C-suite manager to define "success," you will likely get a number of different answers. With a digital enterprise, success is measured for the business as a whole. Some components are easy to quantify, such as the amount of revenue generated or the amount saved by reducing overtime costs. Other elements are difficult to assign a dollar value, such as enhanced public opinion or word-of-mouth referrals from satisfied customers. While certain rewards may be evident in a relatively short time, others may be invisible for many months or even years. Each company must determine its own benchmarks for a successful transformation, but it is important to remember that once again, you are trying to hit a moving target.

 

While it is obvious that you need to budget for your digital initiatives, you must realize that traditional budgeting formulas simply will not work. Build in some flexibility and some cushion. Plan, but be willing to revise your plans frequently. Be prepared to adjust your priorities and goals as required. Schedule periodic reviews to monitor progress, goals, and achievements. Stay current on technology, and if a better solution appears, be willing to switch mid-stream.

In other words, you may be able to establish an accurate budget for a piece of the transformation, but you simply cannot predict a total project cost for the move to a digital enterprise.

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Topics: Digital Enterprise

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