Digital Transformation Needs New Metrics
Q&A: Digital businesses require a portfolio of strategically chosen, observable KPIs — not warmed over corporate metrics
Courtesy of WSJ CIO Journal
For all the time, effort, and money invested, the corporate world’s track record navigating successful digital transformations can appear bleak. There may be countless reasons for failure, but among the most common is a tendency to measure the wrong things, according to Michael Schrage, research fellow at the MIT Sloan School of Management’s Initiative on the Digital Economy (IDE).
“Legacy companies often confuse means and ends and measure them inappropriately,” Schrage explains. “The purpose of digital transformation is not digital transformation for its own sake or just doing things faster/better/cheaper.
Simple lift-and-shift approaches typically just move the same old operating models to the cloud. That misses the real business opportunity:
providing enhanced, digitally enabled business capabilities for greater value and agility. That requires a different set of key performance indicators.”
In a recently published paper, Schrage and co-authors Vansh Muttreja, an engagement manager for Monitor Deloitte, and Anne Kwan, a principal and transformation strategy offering leader, both with Deloitte Consulting LLP, outline a new approach to key performance indicators (KPIs) focused on data-defined business objectives. Here, they discuss what this means for enterprises.
Q: Despite the ubiquity of digital transformation today, many organizations still struggle to measure and prove the value of these efforts. What makes this task so challenging?
Kwan: There are a few factors, and one is the role of metrics. Many companies view KPIs as a way to keep score and report after the fact rather than using them to lead. KPIs should help companies articulate what they’re transforming and how to get there, including the desired outcome. Better KPIs lead to better transformations.
Many organizations also struggle because they have too many metrics, or the wrong ones-measures of the company’s technology infrastructure, for example, such as the number of users per license purchased. What’s really needed is a portfolio of concrete, observable KPIs linked directly to transformation outcomes. Finally, there needs to be a commitment to data as an asset, with quality, standards, and governance, so that the right data is within reach for measurement purposes. That’s a hurdle not every company is necessarily prepared to overcome when it has a digital transformation agenda on its plate.
Q: What are some of the most common mistakes companies make in this area, and how can they approach it instead?
Muttreja: First and foremost is effectively treating KPIs as unrelated to the company’s transformation goals. If KPIs are not linked to the company’s North Star, they’re not going to incent the right behavior. Another common mistake is choosing transformation KPIs too similar to business-as-usual KPIs. There’s no denying the latter have their place-they’re important in financial reporting, for example-but transformation KPIs need to be leading and forward-looking, not retroactive. Finally, many companies view KPIs as siloed measures rather than as an integrated portfolio that can help drive transformation objectives.
Schrage: Many companies will pick their five or six favorite KPIs and effectively re-create their functional siloes in the cloud. In doing so, they may minimize interdependencies and cloud-enabled opportunities to collaborate. With a more strategic KPI portfolio approach, on the other hand, companies first identify their top transformation goals and determine how they want to measure them — customer lifetime value, for example, or employee experience. They recognize the interdependencies and select KPIs that will help their organizations differentiate themselves in the minds of investors, employees, and customers. Commodity KPIs, such as simply a comparison of your revenue to that of peers, basically turn you into a commodity company.
The digital transformation environment is all about finding new ways to create new value-not just doing what you have always done faster, cheaper, or more reliably.
Q: Can you give an example of a well-chosen KPI a company might use, as opposed to a legacy one?
Muttreja: First, it’s a good idea to limit the number of KPIs used: between five and nine seems to work well. They should be mutually exclusive and exhaustive interdependent measures of the company’s transformation objectives.
Here’s an example: A global technology hardware company sought to increase customer lifetime value while radically simplifying operations. To measure operational efficiency, a commonly used traditional metric might be functional spending as a percentage of revenue. That’s a backward-looking KPI; a scorecard that can’t drive action. Forward-looking alternatives could include cycle time, for instance, which indicates if a process is being completed in a certain amount of time compared with targets; if it isn’t, the underlying system technology may need to be changed.
Another strategic KPI for operational efficiency might be the number of general ledgers in the company; if there are 20 across the organization globally, that may signal a problem not just with finance systems but also with legal entities, ultimately requiring simplification.
Q: What is your recommended approach for KPI definition?
Muttreja: We recommend a four-step approach. First is creating a strategic KPI portfolio with a balanced focus on predictive and retroactive outcomes and observable links between KPIs and the organization’s strategic objectives. Next is committing to data as an asset and defining the key data points that make up the KPI portfolio. For example, who or what is a customer? Clear, objective, enterprise-wide data standards and definitions are critical. The third step is orchestrating data flows. KPIs have multiple building blocks; orchestrating measurement data’s journey through systems, processes, business units, functions, and geographies is an essential part of calculating trustworthy strategic metrics. Finally, committing to continuous improvement helps ensure that KPIs evolve.
Schrage: Right-KPIs are waypoints, not endpoints. They are North Stars to navigate by rather than destinations in and of themselves. I am stunned by how many business leaders talk about their strategy or vision without explicitly referencing their KPIs.
While it’s very important to be able to tell your organization’s story and ambitions, you want strategic KPIs to be characters in your strategic narrative — not mere props or background.
Q: Who in the C-suite needs to be involved?
Kwan: It’s a top-down effort, and all executives must buy in. If chosen well, the KPI portfolio should reflect their collective goals. Typically the chief transformation officer leads design of a shared set of KPIs, but we’ve seen the COO handle this cross-functional task as well.
Q: What’s the best way to get started?
Kwan: For those overseeing an in-flight digital transformation, it can be useful to go back and audit the KPIs currently in place. Those about to embark on one can benefit by asking some key questions: What is the overall strategic vision for the transformation? What tangible goals link to that statement? What key inputs and actions correspond to each tangible goal? What is the possible universe of metrics that can reliably measure each key action? What is the prioritized portfolio of metrics?
Schrage: Transformational leaders embrace KPIs as a way of holding themselves and their employees accountable against strategic goals using metrics that inspire new growth opportunities. Strong KPI portfolios give company leaders and their boards of directors confidence in and insight into the ways the business is measurably improving how it creates value for customers, investors, and partners alike.
By Katherine Noyes, senior writer, Deloitte Insights for CIOs
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Originally published at https://deloitte.wsj.com on September 26, 2022.