Ask a CIO how he or she quantifies the impact of their digital transformations and you may get a funny look, like you told tasteless joke. The reality is that many CIOs don't have metrics for gauging the success of digital projects, such as new eCommerce platforms, mobile apps and chatbots. But CIOs who fail to quantify these initiatives may find themselves outflanked by nimbler rivals, analysts say.
To score the value of their transformation efforts, CIOs must use digital key performance indicators (KPIs) as their "enterprise compass,” Peter Sondergaard, Gartner's global head of research said at the company's Gartner Symposium/ITxpo 2017 this October. But there's a chicken-egg quandary at work: You can't measure what you haven’t defined.
“The biggest limitation [of digital KPIs] is the lack of a clearly defined digital ambition," or strategy, Gartner analyst Paul Proctor told CIO.com recently. "Having a clear idea of your digital ambition will give you some ideas of what you should be measuring to measure your progress. You can't measure something you don’t have a measuring stick for."
What are digital KPIs?
Digital KPIs are measurable values for evaluating the performance of digital business initiatives. Digital KPIs can help an organization ascertain how far it has progressed on its digital strategy and how well it is improving its digital business outcomes.
Companies have traditionally measured business performance based on net profit, earnings per share and other Wall Street metrics — numbers that in turn are supported by more specific KPIs such as inventory turns, production quotas and customer satisfaction. Digital KPIs, on the other hand, are more difficult to define, as businesses across different sectors have different ways to quantify their digital initiatives.
Digital KPI examples
For some industries, a key digital KPI may be the percentage of revenue generated through digital channels such as the web and mobile apps. A life insurance company may measure the percentage of sales made through self-service digital channels, while a property-and-casualty insurer may measure the percentage of claims submitted through digital channels.
DBS CIO David Gledhill created instrumentation and metrics to track operational efficiency and digital engagement for the bank's customers. “Digital engagement drives business and revenue volumes and so just the metric of how many times a customer touches you is important,” Gledhill told CIO.com earlier this year.
How to define digital KPIs
Gartner’s Proctor says that enterprise CIOs seeking to craft digital KPIs should begin by targeting two broad categories. The first set of KPIs should assess the company's progress in digitizing its current business model by measuring goals in sales, marketing, operations, supply chain, products/services and customer service. Several restaurants, including TGI Fridays and Wingstop, for example, are using chatbots to help digitize order taking and transactions. Starbucks, Target and several other consumer-facing organizations now let consumers pay for goods from their phones instead of cashiers. CIOs should evaluate such digital operations using metrics that assess adoption rates and business impact relative to traditional operating modes.
A second set of KPIs should assess new revenue sources generated from new digital business models. These KPIs should represent growth, revenue, market share and margin metrics that are differentiated from physical assets. Proctor & Gamble acquired Dollar Shave Club, giving it a platform from which to sell razors online. Caterpillar acquired Yard Club to rent heavy machines through an online marketplace. Cleveland Clinic sells algorithms for analyzing cardiology and oncology through Apervita's online marketplace. These new sources of revenue based on digital models should be evaluated separate from analog revenue streams to assess how they impact the bottom line.
Digital KPI best practices
While many companies are undertaking digital transformations, only about half of CEOs Gartner has surveyed have KPIs to measure digital success, Proctor says. He recommends several steps CIOs can take to measure the value of their digital business:
Work with senior executives to quantify the extent to which their areas would benefit from digitalization. A CIO might work with a COO to define how much of the company’s manufacturing operations should be digitalized and what benefits to expect.
Set KPIs and goals that lay out the digital business journey and sharpen expected business outcomes. For example, Proctor recommends that healthcare CIOs shift from talking about connected healthcare as a vision to proposing the potential percentage of patient "visits" that will employ telemedicine. This quantifies a clear goal. Then describe the expected benefits of achieving this goal.
Measure the progress of your digital journey and the business value it creates. Here, some KPIs will be "transitional," while others will become permanent metrics for business performance as transformation is achieved and digital business becomes standard operating procedure. For example, an enterprise that builds a digital ecosystem may permanently add ecosystem metrics to its ongoing business performance KPIs. Good metrics should influence C-suite decisions such as budget allocations, business process improvements and culture changes.
Use KPIs to support specific outcome expectations, such as, "By reaching our 2020 goal of digitizing ABC, we will benefit from an X increase in these business and financial metrics."
Don't overdigitize your business. Shoehorning too many customer interactions via digital channels can create negative impacts. For example, expecting all sales to go through a digital sales channel will upset some customers and provide very little chance for high-touch engagement. An enterprise should determine the "balance point" at which the amount of digitization is ideal for customers and employees. Each KPI should have a balance point that counters the risks that come with going all digital.
The benefits of digital KPIs
There are no silver bullets or magical formulas for digital business success, but KPIs can help. “The digital KPI is all about understanding where you’re making money or improving an existing business model, how to measure that and work with your non-IT execs to achieve new business outcomes that you've set based on the fact that you're going digital,” Proctor says. "Outside of that all that you have is a collection of new projects that are using technology to do new stuff and unfortunately that's where most businesses are today."
The stakes are high for CIOs and their C-suite peers to cement a digital strategy — and even higher to establish KPIs to measure its effectiveness. Disruption, the kind that Amazon.com has unleashed across the retail landscape, occurs in a market once digital revenue hits 20 percent of the total. “If you’re not [reasonably] digital at that point, you’re toast,” Proctor says.