Evaluating 21st Century Digital Solutions

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Evaluating 21st Century Digital Solutions

Given the prevailing fuzzy definitions of the term “digital,” it is not surprising that business leaders are often unsure how to evaluate the myriad technology-enabled initiatives being proposed to them and determine how much value they may create. In a 2018 McKinsey & Company survey of 1,733 managers, about 80% said their organizations were pursuing digital initiatives. But only 14 percent of the managers said they had realized significant performance improvements from these efforts, and only 3 percent said they had successfully sustained those benefits.

Like the McKinsey consultants, the Trends editors find that this inability to identify and measure sustainable competitive advantage typically occurs because companies lose sight of the business fundamentals when seeking to achieve digital transformation.   These business fundamentals simply involve, evaluating digital projects and strategies based on the cash flows they are expected to generate and comparing those to realistic “do nothing” base-case scenarios. 

In the case of digital projects, the do-nothing case may not mean net-zero change; it typically means a steady (or accelerating) erosion of value. Consider the decision many banks have faced over the years about whether to invest in mobile-banking apps: if all of a bank’s competitors have mobile apps and the bank doesn’t invest in one, its market share will likely fall over time as it loses customers or fails to attract new ones.  Therefore, the real “base case” over the relevant time horizon is not stable profits and cash flows; instead, it is a decline in profits and cash flows—along with a reputation for being a “stale brand.”

Unfortunately, for reasons of psychological comfort and even self-preservation, business leaders are typically reluctant to build and share business-as-usual projections that show declines in profits and cash flows. Yet such declines are what most often happens when companies avoid change. Companies must be realistic about the potential for declining base cases. And, by developing an honest base case and a full range of cash-flow scenarios, business leaders can more meaningfully compare digital initiatives and strategies against other investments that may be competing for scarce resources. This approach may also prompt companies to think more strategically about how, when, and how much to invest in digital projects, given how quickly customers’ expectations are changing.

Building a realistic base case can provide the data needed to vet the potential impact of a digital strategy or initiative. It is also important, however, to identify the type of impact that digital strategies and initiatives may have and frame investment discussions accordingly...

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