Planning Investments in Digitalization

More than half of businesses admit that they don’t plan investments in digitalization comprehensively, but only in a temporal manner. Almost the same number of companies plan investments at least a year in advance. It is estimated that before the pandemic, manufacturing companies allocated around 7% of their profits for digitalization, with the exact percentage varying across industries. 

Regardless of how much is budgeted for digitalization, one question remains unchanged: How exactly will we benefit from it, and when will it pay off?  

Thanks to digitalization, we can achieve two kinds of benefits. The first kind is hard and measurable, related to savings in energy, time, materials, inventory reduction, increased production. The second type could be described as intangible, soft benefits, including increased employee engagement, organizational loyalty, and improved brand perception. While both are pivotal, neither can be achieved only through the adoption of new technologies. 

I continually stress that every change operates within a triangle encompassing people, tools, and processes, and only by engaging all these three components can we achieve meaningful outcomes. While deliberating on change is a good start, it leads nowhere without the approval of the CFO or other relevant decision-makers, who naturally seek insights into the Return on Investment (ROI). 

Can a tool provider accurately estimate ROI without influence over all vertices of this triangle? In my view, not entirely, or at least not with complete transparency. Of course, we can employ more or less relevant benchmarks, but their applicability will remain approximate at best. 

In this context, I prefer to invert the question and ask: How much do you want it to be? Although it might sound like another sales tactic, this question holds profound significance. 

By assuming a target ROI and using insights from the previous year’s financial performance, we can estimate the proportion of profits our investment will absorb. Moreover, by considering the organization’s historical cost-effectiveness, we can project the necessary increase in turnover or margin (or both) to recoup our investment in the desired period. Therefore, rather than citing a generic two-year ROI, we can specify that if the total of initiatives along with the implementation of tools in the first year increase the performance by 2% and reduce the cost by 3%, and in the second year another 3 and 4% respectively, then the ROI will take two years. 

This estimation resonates more effectively with decision-makers, who possess intimate knowledge of their organizations’ capabilities and constraints.  The consultant’s role is only to identify the areas which will be impacted by the implementation and propose strategies to maximize their potential. 

The Budget Decision-Making in Digitalization Projects 

• More than half of businesses admit that they don’t plan investments in digitalization comprehensively, but only in a temporal manner.  
• Almost half of businesses plan investments at least a year in advance. 
• Only 2% budget their investments in another way.