Risk Mitigation for your Digital Transformation Journey
I bet almost every email or blog you've read since March started with the reflection on the pandemic and how hard it hit everyone. But trust me, it fits here. Whether we wanted it or not, the global pandemic made it clear that going digital is crucial for any business. Your leadership team (one way or another) learned the value of Digital Transformation: they now know that it's one of the vital strategic differentiators for your organization, and it will help accelerate your recovery plan for 2021. But after the first motivation hit and excitement waves are ebbing, critical questions begin to surface: how long and how much? Here are my thoughts.
After leading 120+ Digital Transformation Projects, we've learned a lot and have some numbers to share. I'll focus on two major metrics that CXOs and project managers use to measure success: Implementation Time and Cost. Numerous variables affect those metrics, but they remain relatively consistent among companies of similar size and complexity.
Digital Transformation Metrics
Let's start talking numbers. For small-sized companies, the annual revenue is somewhere between $2M and $10M, and most digital implementations require six to eight months. For mid-size organizations, where the annual revenue is $10M-$200M, the time needed to implement necessary changes and strategies increases to 12-18 months. It is important to note that these figures are trending higher in the last two years, mainly because the major vendors are concurrently releasing newer, less proven, and less mature flagship ERP products to the market, creating additional complexities and difficulties during their customer's implementations.
Actual implementation budgets are mostly irrelevant since this number varies widely based on company size. For this reason, we normalize implementation costs to be expressed as a percentage of ERP license cost & complexity of the organization's business process.
We noticed that small companies see the total cost of ownership falling between 3% and 5% of their annual revenue. For companies with revenue being $10M-$200M, ownership cost falls in the range from 2% to 3% of yearly revenue.
The numbers are smaller for larger organizations, primarily because they have higher economy of scale on their transformations. In other words, there is a minimum cost that must be spent on any transformation regardless of size, so larger organizations experience lower costs when expressed as a percentage of revenue.
Most impactful variables on implementation time & cost
We examined dozens of behavioural and qualitative factors in our projects to make up a list of five variables that have the strongest correlation with implementation time and cost. Here they are:
- SCOPE – companies with broader scopes of functional areas experienced higher durations and costs.
- MAGNITUDE OF CHANGE – companies that made the most significant changes to their organization experienced the highest durations and costs. For example, migration from a mainframe-based system to a modern solution took more time and bigger budgets than smaller, incremental changes.
- COMPLEXITY OF OPERATIONS – business models with more units, operations in more countries, and other complexities experienced the highest durations and costs.
- LEVEL OF ORGANIZATIONAL CHANGE SUPPORT – those who invested the most in organizational change experienced lower duration and costs.
- LEVEL OF SOFTWARE CUSTOMIZATION – those with higher need for customization experienced longer durations and increased costs.
The short version: organisational complexity increases costs and duration, investing in professional change management decreases both factors.
One of the highest costs and biggest risks for any digital transformation is operational disruption after go-live. However, these costs and risks can be challenging to predict and mitigate without proper expertise and guidance. Of all the metrics we quantified when working with our clients, this one had the highest degree of consistency over the 120+ digital transformation projects with our own clients.
But what is operational disruption?
Operational disruption is the tangible, measurable disruption to operations as a result of the transformation process. For example, being unable to ship products or close books are the two most common operational disruptions. This metric does not include smaller and more common disruptions, such as employee frustration, short-term inefficiencies, and other relatively minor disruptions.
Especially at the time of go-live, the duration of disruptions varied greatly, ranging from a few weeks to several months. Also, the disruption costs increased the initial cost of the implementation to anywhere between 50% and 300% of the cost to implement the transformation.
Variables with the strongest impact on operational disruption
We listed the variables that had the most decisive and direct impact on the level of operational disruption that organizations experienced:
- CLARITY OF DEFINED BUSINESS PROCESSES – organizations who spent more time defining clear business processes before or early on in their transformations were less likely to experience disruption.
- INVESTMENT IN ORGANIZATIONAL CHANGE AND TRAINING – those who implemented complete and effective change strategies were less likely to experience disruption.
- LEVEL OF EXECUTIVE ALIGNMENT AMONG KEY STAKEHOLDERS AND THE TRANSFORMATION PROJECT TEAM – those that rated higher in executive, stakeholder, and project team alignment were less likely to experience disruption.
- TIME AND EFFORT SPENT DURING USER ACCEPTANCE TESTING AND CONFERENCE ROOM PILOTS – the more thoroughly a company tested its processes and systems, the less likely they were to experience disruption.
Companies that excelled in these four areas were the most likely to experience successful digital transformations with the least amount of operational disruption.
At Flawless Inbound, we have worked with six specific Industries to help them in the Digital Transformation Journey during 120+ Digital transformation projects: Manufacturing, SaaS, MSP/VAR, Life Sciences, Construction, and Engineering. Through those years of varied experience, we are consistently getting stronger in mitigating risks and lowering the TCO (Total Cost of ownership) for our clients.
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