Chapter 10: Measuring the Value of Transformation

In the previous chapter, we learned about the pitfalls of industrial digital transformation. We looked at the leading indicators of failure of transformation. We compared some large industrial companies to deep dive into the success and failure of digital transformations.

In this chapter, we will learn about developing the business case for investment in industrial digital transformations. We will also discuss how to evaluate investment outcomes. This chapter will cover the following:

• Developing the business case for transformation
• Productivity and efficiency gains
• New digital revenues
• Social good

Developing the business case for transformation

Before we start our transformation journey, we will need funding for our project. In most organizations, that requires a business case. Even in the rare organization where a business case is not required to obtain funding, it is a good practice to develop a business case to ensure that the organization is fully aligned with the objectives of the transformation and that the transformation will provide value to the organization. This is important whether the transformation will involve one small project or an entire Fortune 500 company.

In this section, we will briefly explore the process of developing a business case and provide you with the tools necessary to create a business case for your digital transformation. In a traditional product or project development environment, the first activity would be to build the business case. However, one of the common challenges with digital transformation is that the entire agile approach of digital...

Productivity and efficiency gains

The ROI, during an industrial digital transformation, can be in the form of business productivity and process efficiency gains, in addition to new digital revenue. Let's take the example of airline baggage handling.

The airline industry

Prior to the COVID-19 pandemic, Delta Air Lines carried about 180 million passengers annually along with about 120 million checked airline bags. In 2016, Delta decided to invest $50 million to modernize its baggage handling solution and use Radio-Frequency Identification (RFID) enabled baggage tags (see https://news.delta.com/iata-follows-deltas-lead-rfid-bag-tag-mandate). This would improve the efficiency in the system, reducing any adverse impact of mishandling baggage. The intended outcomes of this RFID initiative are as follows:

• Reduced instances of bags left behind, misrouting at a connecting airport, or delayed arrival at the destination
• Reduced instances of theft of bags or pilferage...

Digital revenue

This section will focus on new digital revenue from transformation, which helps to improve the-top line revenue of the company. Let's begin with an example from the energy industry.

Electricity value chain

Let's look at the electricity value chain here. Utility companies use gas or coal generators to generate electricity. In order to meet the fluctuating demand from a hot summer day for cooling and from a cold winter day for heating, often utility companies have to engage in energy trading. Northern California encountered a serious electricity shortfall due to excess heat in August 2020, leading to significant rolling power outages. This is primarily driven by the fact that electricity cannot be stored at large scale by utility companies. Due to the variations in energy supply and demand on a daily and even hourly basis, energy prices fluctuate over a wide range. On average, the US residential customer pays about 13 cents per kilowatt hour (kWh). However...

Social good

The third type of benefit from digital transformation is social good. Social good is something that benefits a significant number of people. For example, the United States Environmental Protection Agency's mission to ensure clean air, water, and land is a social good. Social good is the basis for much of the work performed by governments and philanthropic organizations.

In 1970, Milton Friedman, one of the most famous economists of the 20th century, put forth the theory that the role of a CEO and, therefore, a corporation, was to maximize corporate value without regard for any effects on individuals or society. This theory was widely embraced and the effects of corporations maximizing profits without regard to their impact on others, known as externalities, resulted in substantial negative impacts, such as environmental pollution. However, in recent years, most private sector organizations have recognized the impacts of negative externalities and embraced their...

Summary

In this chapter, we learned how to measure the value of transformation. We learned how to build a business case for your digital transformation and about the three types of business value that can be gained from industrial digital transformation: productivity and efficiency gains, new digital revenue, and social good. This chapter has provided us with the tools needed to obtain funding and get ready to start on our transformation.

In the next chapter, we will put everything we have learned so far together and create a blueprint for success. We will discuss how to ensure the success of a digital transformation, provide a playbook that can be followed, and sustain a digital transformation.

Questions

Here are a few questions to test your understanding of the chapter:

1. What are the seven steps of developing a business case for digital transformation?
2. Why is it important to complete a proof of concept before building your business case?
3. Describe the three types of benefits that can come from a digital transformation project.
4. What are the key factors in an ROI analysis?
5. Give some examples of the societal benefits of digital transformation.