At the end of last year, I asked a fundamentally simple question that’s difficult to answer, Should You Try Calculating ROI on Digital Transformation. My answer is yes, but the question is when, to what level of investment, and to what extent.It’s a difficult issue for those driving transformation because the first questions normally asked by seasoned business executives are around costs and ROI. Those driving the transformation know that without some testing of the strategy, expertise in platforms, and maturity of practice, it’s really difficult to provide financial estimates with any degree of accuracy.

What Digital Practices Are Needed – And When

I developed this very simple framework to help define key digital practice areas and when to invest in them as part of a digital transformation.

• • In early Planning Stages it’s critical to align executives leading the transformation on vision. It’s also important to begin establishing technology platforms through proof of concepts and to develop Agile practices which I believe is fundamental to any transformation. When the business demands financial estimates, it’s best to provide cost estimates as “investments” and avoid the trap of calculating ROI and other longer term KPIs. To get “buy in”, executives need to market the transformation internally so there are sufficient internal champions and supporters.

• • By Early Execution Stages, hopefully you’ve won over enough champions to support an investment. Focus now needs to shift to the Customer and understanding needs, personas, market opportunities, and competitive factors. This is in line with developing Product Management disciplines which are key to digital transformations where customer need and opportunities should drive priorities and investment. On the technology side, teams need to mature agile practices (see my posts on Agile Estimation, improving agile team velocity, agile architecture, and QA in agile) and begin DevOps practice areas. This is also the place to start partnering with Marketing on automation and with Sales to instill operational disciplines – no sense transforming if these departments aren’t getting ready to sell to digital audiences. Financial analysis should now include cost driven ROI and other KPIs, but revenue projections in this stage is still too early. And in order to achieve an ROI on cost driven deliverables, leaders must focus in getting internal early adopters of new technologies and practices to help drive efficiencies and other operational improvements.

• • In Later Execution Stages, Product Marketing, Digital Marketing, and sales operations become critical in order to test revenue generating ideas and let prospects and customers shape strategy and execution. Organizations will need maturity in digital Sales, and Marketing in order to develop digital businesses. It is also at this point when ROI from transformation investments should include revenue and top line growth.

• Transformation occurs when the digital business is outpacing its legacy roots. Digitally transformed businesses typically develop an ecosystem that blur the lines between supply chain, partner, customer, crowd, and employee and both strategy and execution are heavily influenced by this ecosystem. It’s at this point where financial maturity needs to drive business decisions on customer segments to target, legacy businesses to shutdown, pricing, bundles, and incentives.