Keeping Digital Transformation on Track

Performance metrics that don’t evolve along with business goals aren’t really measuring the value of digital technologies

“The most dangerous step leaders take in pursuit of digital transformation is declaring digital transformation their goal. More than any other error, confusing the means with the end is responsible for the dismal digital track record of transformation efforts.” That’s one primary finding of new research by MIT Sloan Management Review and Deloitte.

“Unfortunately, we find KPIs undervalued and underutilized as analytic assets for leading digital change,” they conclude.

To find out more about these challenges and how leaders can avoid common pitfalls, MIT IDE Content and Editorial Manager, Paula Klein, caught up with Michael Schrage, IDE Digital Fellow and co-author of the report, for more details.

IDE: Your article describing how “the wrong KPIs (Key Performance Indicators) can doom digital transformation” is both a practical and tactical call to leaders to rethink big data, the cloud, and algorithmic innovation. What do your case studies suggest about this? What’s the most important takeaway for other leaders?

Michael Schrage: The most important takeaway is: Don’t confuse means and ends. That is, the purpose of digital transformation is not digital transformation itself; it’s reaping the business benefits of new digital capabilities.

Similarly, the purpose of better KPIs is to gain data-driven insights about what performance improvement can be. What are the outcomes you want to measure and align around?

For our research, we observed too many companies coming up with better KPIs primarily for their digital transformation roadmaps; they’re not recognizing how better digital capabilities fundamentally require rethinking what customer experience and employee experience should mean. Companies with digital models from the get-go are better off; digital is their native tongue. Legacy companies, by stark contrast, tended to just replicate their existing KPIs. Their digital transformation mindset typically defaulted to, ‘how do we lift and shift our KPIs to the cloud?’

What they really need to ask is: ‘If we’re really going to live, compete, and succeed in the cloud, what should our KPIs become?’ Cheaply and efficiently going to cloud has become the end, not the means to a larger goal.

IDE: What should businesses be focusing on instead of transformation as an end goal?

MS: Many surveys show that executives are unhappy with their organization’s digital transformation initiatives when they ultimately prove to be disconnected from strategic KPIs.

By contrast, successful transformers have a constellation — a strategic portfolio — of KPIs to guide their journeys. They explicitly align inputs with outcomes.

Essentially, you can’t measure how you digitally transform unless and until you transform how you measure. For example, if you’re not revisiting and revising how you measure customer lifetime value (CLV) in a world of digital influencers, attribution, recommendation, and personalization, you’ve missed the point. In the final analysis, your strategy is your KPIs and your KPIs are your strategy; transformation should follow accordingly.

IDE: These are important recommendations, but they also may be subtle and difficult to implement. What types of resistance and pushback inhibit progress?

MS: There isn’t one big obstacle, but there is a mix of impediments. Sophisticated and technically capable leaders immediately ‘get it,’ but they may find that their data governance, master data management, and metadata management are too fractious or fragmented. They may be torn between selecting KPIs as leading indicators that help them anticipate trends versus lagging indicators that help them report and synthesize what has already happened. They lack the KPI data they need to do what they want and are analytics-rich, but data-poor. Other firms use digital transformation to improve their legacy KPIs — such as CLV or Overall Equipment Effectiveness (OEE) — but primarily at the margins of the organization.

Photo by Austin Distel on Unsplash

It’s also not uncommon to hear CEOs and CFOs say that they want to wait-and-see how their digital transformations go before they embrace novel strategic metrics. That means marketing, sales, operations, and finance will have digitally enhanced KPIs– but leadership will now be orchestrating functional silos rather than having an overall KPI portfolio to help guide and align the entire enterprise.

The bottom line, we argue, is that leaders should see and treat KPIs as organizing principles for digitally enabled value creation rather than a way of keeping score.

In a big data era of ever-smarter algorithms, KPIs really should be where value creation discussions begin.

IDE: Taking look far into to the future, along with much smarter algorithms, will there be a role for what we now know as KPIs, if we’re all in the metaverse?

MS: There’s a lot to consider! When we get there, metaverse metrics will have to be a quantitative blend of philosophy, theology, and teleology. Whose metaverse is it, exactly? What is the purpose of this metaverse? There will have to be reasons why people want to live and work there, so maybe KPI will stand for Key Purpose Indicator, or Key Presence Indicator. Much the way we use space telescopes and astronomical instruments to better measure and understand our real universe, I bet we’ll need new, novel forms of digital instrumentation to measure metaverse phenomena.

I wouldn’t be shocked if by 2025, we see Google, DARPA, Nvidia Corp., or Meta, or the next-generation of tech companies, hosting metaverse measurement and metrics seminars where philosophers and theologians — rather than computer scientists and computational physicists — give the keynotes!

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The IDE explores how people and businesses work, interact, and prosper in an era of profound digital transformation. We are leading the discussion on the digital economy.

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MIT IDE Paula Klein, Editor

MIT IDE Paula Klein, Editor

Addressing one of the most critical issues of our time: the impact of digital technology on businesses, the economy, and society.

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