Insight — Knowledge Capital Partners

One of the biggest impediments on the road to digital transformation is the method used to assess its real cost and its real return. In the majority of companies, the business case is built on old investment evaluation techniques, no longer fit for purpose. Like so much else in realizing the potential of digital technologies, we need to think bigger, outside yesterday’s box.

From research into hundreds of deployments, KCP has developed a more comprehensive and accurate evaluation model. It works right across the progression of RPA and cognitive technologies, to capture the full value of transformation.

In this fast-moving space, arguably no company Board should embark on this journey without this new Total Value of Ownership (TVO) model informing their decisions. Professor Leslie Willcocks and Dr. John Hindle, of Knowledge Capital Partners, set out the case for capturing Total Value of Ownership.

Initial adoption of Robotic Process Automation (RPA) typically starts with efficiency – using new technology to improve accuracy, quality, and speed while reducing costs. And the most common business case metric is some variant of Return on Investment (ROI), with the reference benchmark being the cost of a Full-Time Employee (FTE). But we know from decades of research that traditional ROI measures and cost/benefit analyses typically understate ‘soft’ and strategic benefits when applied to IT investments, and don’t account for many operational, maintenance as well as human and organizational costs, which can exceed technical costs by 300-400%.

One remedy, at least on the cost side, has been to focus on Total Cost of Ownership (TCO), defined as the total technical, project, human and organizational acquisition and operating costs as well costs related to replacement or upgrades at the end of the life cycle. TCO adds up all resource costs across all the activities comprising the automation life-cycle, flushing out hidden costs so often missed when using ROI.

THE MISSING PART

The real limitation so far in automation assessments, however, has been in establishing benefits. Inherited from IT evaluation practice, one tendency has been to understate total costs in order to be able to allocate only hard, financial benefits allowable under traditional ROI or TCO measurement regimes. But this does not lead to gaining strategic value from the technology. The truth is that a new measure of net benefits is needed in order to drive strategic behaviour and gains

Based on extensive research at Knowledge Capital Partners, we have developed a new measurement framework for service automation investments we call Total Value of Ownership (TVO). With this concept, the objective is to ensure that business cases for service automation are driven by:

total costs (both explicit and hidden costs)
multiple expected business benefits, and the strategic returns from future business and technical options made possible by automation (hidden value).

“A new measure of net benefits is needed in order to
drive strategic behaviour and gains.”

THE NEW TVO FRAMEWORK

Our TVO Framework is shown below, with Total Costs on the left hand side of the equation, matched against Total Benefits on the right.

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On the cost side we include all relevant activities and resources, not just traditional ROI inputs. On the benefits side, we have already found very strong empirical evidence amongst clients using RPA and intelligent automation to achieve a ‘triple win’ for shareholders, customers and employees. Our “Three E’s” framework – Efficiency, Effectiveness, Enablement - is designed to capture all these, but also locates further hidden value frequently omitted from clients’ business cases.

FINDING HIDDEN VALUE

Much hidden value resides in the potential from applying process analytics for further Efficiency gains. Additional hidden value is located in the Effectiveness area (‘doing things right/differently’) by using automation and analytics to change how business is done, or to extend its capabilities. Meanwhile when we come to Enablement, we have already found multiple examples of enhanced customer journeys, new services, and increased profit/revenue.

“Discounting the source of major hidden, future value is a serious mistake.
”

Furthermore, we need to capture the hidden strategic value of the future options enabled where RPA creates a powerful, low-code digital business platform, operating something like a ‘bus’ on a computer motherboard. But here connecting and integrating a growing range of innovative cognitive and AI workflow solutions to support a blended human and digital workforce – including Natural Language Processing (NLP), Optical Character Recognition (OCR), Machine Learning (ML), and other process-and industry-specific tools. Discounting the source of such major hidden, future value is a serious mistake.

Identifying and capturing these business-driven Effectiveness and Enablement value opportunities requires evolving the initial RPA Center of Excellence – first to become an Automation Center of Excellence, and ultimately to become what we call a Center of Enablement.

KCP is an independent research and advisory firm, expert in helping developers and users to find the right path forward with transformative technologies. If you would like to explore how your organisation can develop a blueprint for Digital Transformation please contact KCP Partner Matt Stanton, mattstanton@knowledgecapitalpartners.com

In a new paper that amounts to a reality check on digital transformation, Leslie Willcocks, Emeritus Professor at the London School of Economics and a KCP founder finds that:

While the pandemic has made many businesses accelerate digital developments, a fundamental investment dilemma and intractable management problems continue to limit truly transformative outcomes. But the few that have risen to the challenge look likely to leave their competitors standing.

Today’s organizations are facing a digital catch-22. On the one hand, digital transformation is difficult, costly and risky, and in the short- term investment may be needed elsewhere, where it’s hurting most right now. On the other hand, today’s organizations, the ones that want to become or remain leaders, cannot afford not to become tomorrow’s digital businesses.

There’s no doubt the 2020-21 crisis has accelerated the adoption of digital technologies. But much work remains to be done if organizations are to enhance competitiveness, streamline operations, improve organizational resilience, and become competitive digital businesses.

Many digital caterpillars are still waiting to become butterflies. Digital transformation has to focus on the whole organization, and large-scale change. It involves radical redesign then deployment of business models, activities, processes, and competencies to fully leverage the opportunities provided by digital technologies.

And so it is a very high level challenge. It’s been on many executive agendas since at least 2010. Since then many organizations have digitized (changed things into digital format), and some have digitalized even (used the digitized data to improve or change business operations) , but this does not add up to digital transformation, though many might think it does. Not confronting the real challenge will be costly in the long run.

“Many digital caterpillars are still waiting to become butterflies.”

WHAT HAPPENS IF YOU ‘FAIL TO SAIL’?

Your chances of achieving what the relatively few best performers on digital transformation achieve will diminish if you delay. These technology leaders are winning disproportionate gains, recording markedly higher profitability and revenues, and are accelerating away from the others, and may well establish a competitive advantage that becomes irreversible.

According to one McKinsey study in 2019, they had increased the agility of their digital- strategy practices, enabling first-mover opportunities. They had taken advantage of digital platforms to access broader eco-systems and innovate new digital products and business models. They had used mergers and acquisitions to build new digital capabilities and digital businesses. The McKinsey study also forecast that early adopters of digital transformation would capture an additional 6% per year in annual turnover between now and 2030, while non-adopters would experience a 20% decline over the same period.

The significant feature was that they had invested ahead of their competitors in digital talent.

Our own KCP research in the same year suggested the best performers on digital transformation add up to around only 20% of organizations, all recording up to 30% increase in revenues as a part outcome of their digital technology investments over the previous four years.

To add even more urgency, our evidence, consistent with other studies, shows that being slow to adopt digital technologies may reduce risk in the short term – in terms of cost, talent and time – but build growing business risk and reduced competitiveness in the long term.

“Technology leaders are winning disproportionate gains, recording markedly higher profitability and revenues.”

HAS COVID-19 CHANGED THE PICTURE?

The pandemic has undoubtedly accelerated digitization and digitalization - primarily to survive in the short term, establish resilience, and maintain competitiveness. COVID-19 has pushed companies over a technology tipping point. Between January and October 2020, the digitization of customer and supply-chain interactions and of internal operations had accelerated by three to four years. Funding for digital initiatives increased more than anything else. Those who had invested heavily in digital technologies over the previous three years also reported technology related capabilities that others lacked in the crisis. They were better prepared.

But while digital technologies might be gaining a higher profile amongst key decision makers, the difficulties and complexities of large-scale organizational change on many fronts are not easily circumvented, and there remain many other pressing matters to deal with, distracting executive attention. True transformation is still relatively rare.

“The pandemic has undoubtedly accelerated digitization and digitalization – primarily to survive in the short term.”

SOLUTIONS ARE EMERGING

Route maps and solutions are emerging, however. An evolutionary approach of gradual componentization of parts of the business is being adopted as an approach, producing digitized business operations and units that fit together over time, building towards creating a digital business. Practices that have worked for organizations in catch-up mode include: making their strategy process more dynamic; laying out clear priorities; investing early and aggressively in requisite capabilities and talent (especially at senior executive level).

It’s been made clear from all research that the investment in time and money will only happen if becoming digital is a top priority amongst corporate leaders. They need to redefine how to measure success and empower people. Digital transformations are more likely to be exceptionally effective when companies give people clear roles and responsibilities and put an “owner” in charge of each transformation initiative.

“Innovation loves a crisis. But, with digital and competitiveness, waiting for a crisis has run out of road.
”

All this suggests that there are ways out of the digital catch-22, but senior executives responsible for digital transformation will need to take a much bigger view of the change process, if the potential business value of digital investments is going to be realized. We will be looking at the issue of major organizational change in forthcoming blogs. As COVID-19 demonstrated, innovation loves a crisis. But, with digital and competitiveness, waiting for a crisis has run out of road. KCP advice is: Think, then act strategically, start right, institutionalize fast, and innovate continuously.

BACKSTORY

First base is to know what digital transformation actually is, and is not.

Digital transformation requires digitization - converting something non-digital into a digital format. Digital transformation also requires digitalization - enabling, improving or changing business operations, functions or activities by utilizing digital technologies, and digital transformation, using digitized data to create management intelligence and actionable knowledge. All three - digitization, digitalization and digital transformation - are needed to build a digital business. Digitization and digitalization are necessary but insufficient.

KCP research since the start of the digital transformation era shows the twists that will make this a long journey.

By 2015 most large organizations were espousing digital business strategies. But by 2021, if you exclude the ‘born digital’ and the obvious hi-tech companies, few had become digital businesses.
This is no overnight revolution; organizational change can take a very long time. It’s a journey that underlines the importance of execution capabilities, without which strategy means very little.
What was ostensibly a support activity - IT - can move to the core of the business, and become not just a strategic weapon, in terms of cost efficiency and differentiation, but a fundamental platform for operating in the digital economy.
The 2020-21 crisis has accelerated the adoption of digital technologies and the moves to digital business but left much work to be done if organizations are to enhance competitiveness, streamline operations, improve organizational resilience, and become digital businesses.

Management problems remain intractable.

For many years, in study after study by KCP, we have found that when introducing information, communication and now digital technologies into organizations the majority of challenges and issues - up to 75% - are managerial and organizational, not technological. For digital transformation, the major challenge is getting users to understand and develop competencies for the large-scale and radical organizational change shaped by disruptive technologies. Failures come from unrealistic expectations, limited scope, poor governance, and underestimating cultural barriers.

In the success stories, like Cisco, Unilever, DBS bank, ABB, Nike and Disney, they all had precise, clear, unambiguous, realistic, succinct, measurable objectives that included everyone in the company.

Beyond ROI: Towards Total Value of Ownership