Before launching any project, a financial director will assess the effectiveness of investment in terms of its impact on revenues. The most common indicators and parameters include ROI, the payoff period, impact on profit (including net profit), the amount of investment, the company’s budget and the DCF assessment (Discounted Cash Flow) for longer-term projects, to evaluate the company’s free cash flow in the future. However, when it comes to digital transformation projects, financial experts also look for additional metrics to find a key to evaluating the project’s benefits.
Company strategy as key to assessment
Strategy is a model for assessing digital transformation projects as it pinpoints the company’s current position and goals for the future. It is strategy that determines which processes need immediate optimization and which can wait.
There is a cluster of projects – in particular, those aiming to achieve a company’s strategic goals – where cutting costs is not a good idea. Digital transformation projects may not bring immediate profit but will eventually allow the company to reach a new speed and quality of business operations. New tools provide for more flexibility and more effective decision-making, which can actually prove the project’s value.
For example, transferring data to a cloud, implementing the product-focused approach are time-consuming, long and costly projects that will directly affect a company’s competitive ability and ensure that a company can easily adapt to external changes.
In the current circumstances, digital transformation is no longer a luxury but a necessity. The world is changing, and new generations have different interests and their own perspective on the world. It is important to understand that, without digital transformation, a company will eventually have to chase not only its competitors but its own customers as well.
When looking at digital transformation projects from the strategic point of view, it is always advisable to consider alternatives. For example, a company is considering implementing a tool that may replace an entire department – but the cost of this project equals 30 salaries. The company can postpone the project, but it should understand that it might fail to keep up with the competitors and miss on a larger profit in the long term.
It is also important to remember that the integration of any digital tools requires preliminary preparations such as forming a team which will be engaged in integration, compartmentalizing data and describing all business processes. It may turn out that the company is not ready for digital transformation because it has not streamlined all the relevant processes.
Questions the company should ask itself at this stage:
• Will the digital transformation project help to achieve the company’s strategic goals and how fast?
• Should the introduction of the tool be postponed, how will it affect the company’s competitiveness?
• Does the company have a base to introduce technology tools on?
Assessing automation projects
Budgeting automation projects have a longer return period that other business processes. The company can assess the impact on its revenues through assessing man-hours that might be saved by using a new tool.
For instance, the company plans to adopt an automated budgeting system. It should begin with assessing the working hours of all participants in the process and the salaries for that period and compare them with the cost of the introduction of the tool, which includes user licenses, the work of the integrator, etc. At the same time, the budgeting system directly affects the work of the management and therefore the performance of the entire company. Thus, by assessing indirect factors, one can see whether the project will be efficient. If it is difficult to digitize the project, it is worth trying to search for sources with expert opinions, analyze global studies or learn about other companies’ experience.
In addition, in the case of the introduction of an out-of-the-box digital solution, it should be useful to involve the seller’s analysts, consultants and developers. The integrators often have their own statistics on the projects they implemented, and they can share their data. Thus, for instance, analysts from the Workforce Management cloud system found out that their solution provides for a 1%-5% growth of turnover in various companies.
Assessment by testing
As the foreign software vendors are leaving the market, accessible solutions might not be enough for digital transformation, and it could be viable to develop your own. It is an experiment and it can be a success or a failure, so the company needs to have a budget and the ability to test the new tool.
The development of a new solution is risky and it is important to understand what can go wrong. For instance, the increased payoff period and expenses, or the solution itself might be worthless.
Testing allows you to make the project manageable, and the agile approach proves to be effective in this regard. You can launch a pilot project with small investments and assess its outcome. If something goes wrong, it will be easier to take a step back or adjust your methods. If the testing has shown the solution to potentially increase profits, it can be scaled up.
Project financial evaluation
Another key to assessing any project is a description of the process, its duration, labor intensity, and the number of team players required for its implementation.
During the planning stage of digital transformation projects, initiators create a cost sheet but they often find it difficult to calculate the entire range of costs – and this is where the finance director and the team, who ask questions about potential expenses they may encounter during or after the implementation, act as the main assistants and critics; this lets you see different perspectives on a process and adjust your calculations. For instance, a project includes purchasing new software that will require maintenance and updates, which involves additional expenses – and this is also important to consider.
Let’s say a contact center employee suggests launching a chatbot; he conducts initial research, calculates the cost as well as the time required for the tool implementation, and determines the team line-up. Creating a cost sheet for the project to include taxes and mandatory deductions is an intermediate stage in this process. During the dialogue, the financial expert calculates the payback and the net profit, and also assesses strategic alignment, which is followed by C-level approval. The company will launch a priority project which is mandatory for the strategy implementation; in case there are several such projects underway, the decision is made based on the quick wins approach.
Most cases that fail in terms of unreasonable digital transformation costs are linked to unthorough calculations of project expenses as well as the insufficient quality of project management at the initial stage. This is why it is essential to comprehensively work out all aspects of the new solution and evaluate all financial risks. Companies should act fast in the ever-changing environment, with the assessment made promptly and the financial expert building partnership relations with the business.
Skills for a finance director to assess digital transformation projects:
• Most importantly, business expertise: knowledge of the company’s business processes and its products.
• Being aware of the interconnection between global economic processes and the company specifics.
• Ability to make decisions on launching digital transformation projects and defend them to upper management.
By Anna Rakina, Finance Director, Liga Stavok company