Digital transformation projects are around us for decades. Their meaning and existence do not require much explanation.

There is always a reason for digital transformation projects.

Since 90's we have seen the deployment of many systems like CRM, ERP and BI, and many more. These were digital transformations of their time.

Or there could be completely new solutions available Today, like nowadays popular Machine Learning, Artificial Intelligence, or Robotic Process Automation.

In 5 – 10 years, there yet will be another new topic where digital transformation projects will be on-demand to digitize and automate processes even more. 

 

Many organizations when facing digital transformation projects know why they are just about to invest in this step.

They see those projects as a necessity, no explanation needed.

They decide almost without any analysis GO / NO-GO, focusing on deciding about money and solution.

Others are guided by a potential supplier with justification case for project or similar customer’s use example.

The other reason companies enter projects is a necessity as competition is already undergoing digital transformation.

But it may be the case it is not so obvious why the organization should start a digital transformation journey.

 

When does a company know it should invest in a new project?

How do they measure the benefits of the project over cost and risks that may happen on a project to make a decision for the project?

These are important questions at the start.

These are even more valid questions for smaller organizations that are focused on their own business and don't have extensive teams like Project Management Office to help prepare a decision on project investment.

Let us focus on what are the methods and tools at hand to help better justify the start of the projects, especially those related to digital transformation.

 

Net Present Value

When building a business case of why the organization should invest in a digital transformation project, one needs to take many factors.

The one most obvious and common factor will be the monetary value project will bring when completed.

This is where Net Present Value as KPI (Key Performance Indicator) has been developed and widely used as a world-class standard for years.

What is NPV? In short, it is comparing all costs related to delivering a project to either expected revenue increase or cost reduction of an organization as a result of the project.

As the project has its duration and monetary benefits don't come immediately, it is all measured “in time”.

The common approach would be 3 or 5 years from the project start.

All values are normalized in time using a rate of return– this is why it is called “present value”.

It is a quite simple concept.

For many projects just calculating NPV, it is a strong argument on going for it.

What else comes to the project value formula?

However, many projects cannot show cost reductions or increase in revenue.

What they are to help is just improvement of customer satisfaction by deploying Chatbot solution or need for GDPR solution to comply with regulations.

How do company plans the benefits of this type of project before making the decision?

Here are a couple of other factors which can be considered on top of NPV calculation for the business case of a new project.

 

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Many projects cannot show cost reductions or increase in revenue.

There are a couple of other factors which can be considered on top of NPV calculation for the business case of a new project.

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For regulatory projects, like the deployment of the GDPR system, it could be an avoidance of fines.

Another factor could be the mitigation of operational risk for a company. For example, it could be building another backup data processing center to make the sure continuous operation of critical systems.

There are also many projects which target optimization of the workload of processes in our company.

As an example already mentioned Robotic Process Automation project can help a lot in reducing personnel time to process loan applications in a bank, or simply minimize the need to employ new personnel to support our growing business, as the robot will take over.

All the above examples can be calculated as potential money (in USD) or workload (in man/hours) reductions and added to the project GO decision equation.

They don’t change Top or Bottom Line of the company P&L like NPV, but rather avoid potential costs and risks.

Technical Debt

There is another potential value factor of a digital transformation project.

This is Technical Debt. What is Technical Debt?

It is an accumulation of all issues related to previously deployed technology – specifically IT systems. They could be faulty systems, less tested or outdated technology.

Over time they could create problems with the integration of other data or fitting new features to them. Up to completely stopping a company from growth.

The longer those systems are in use, the bigger the technical debt.

This debt will have to be paid one day. The cost of this debt is a price for migration to better new technology or solution.

 

The technical debt should be also measured and priced in money. This can be then used in preparing the business case for a new digital transformation project likewise NPV or other factors.

Conclusion

Entering a new digital transformation project is always a challenge for a company.

On one end it is given there will be cost-investment and risks, on the other there is expected value. Be it additional revenue, cost reduction, process workload reduction, or fine avoidance.

Whatever is the reason for a new project it is always good to prepare a business case for it. This is to set up expectations for an organization and measure success.

And then make the right decision. Let us go for the new digital transformation project!

 

Note and Disclaimer: The author of this Blog post is Marek Rudnicki. He is the guest author of PMI.hu. The writing reflects the author's own professional opinion, findings, and conclusions, which do not necessarily agree with the position of PMI Budapest, Hungarian Chapter, and cannot be considered as an official recommendation, resolution, or opinion of PMI Budapest. The copyright and publication rights of the writing belong to the original author.