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Vallabh Sambamurthy & Robert W. Zmud

Guiding the Digital Transformation of Organizations - Second Edition

© 2017 Legerity Digital Press

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ISBN 978-0-9857955-9-7

�e Digital Investment Enigma

Chapter

10

Guiding the Digital Transformation of Organizations By Vallabh Sambamurthy and Robert W. Zmud

Second Edition Copyright © 2017

First Edition Copyright © 2012

All rights reserved. No part of this publication shall be reproduced, distributed, or

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Published by Legerity Digital Press, LLC

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ISBN 978-0-9857955-9-7

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Cover Illustration by Aaron Z. Williams

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Chapter 10. The Digital Investment Enigma

Organizations of all types are exposed to unprecedented demands to digitalize

– both imitatively and innovatively – their products, services and processes to survive

and to thrive in the face of digital disruption. Relentless technological progress and

the astonishing creativity being observed – especially that rendered through the

Internet, social media and Big Data analytics – are creating new avenues for gaining

and sustaining competitive advantages. Given such an environment, then, it is not

at all surprising that organizations’ executives and managers regularly find

themselves developing, championing and/or approving digital investments – many of

which are transformational, risky and expensive!

Making decisions about digital investments is certainly not new. Business

investments enabled through or supported by digital technologies have been a core

element of many organizations’ strategies since the mid-1990s. Many of these

investments have paid off well: operational and managerial processes are improved;

costs are reduced; interactions with customers and suppliers occur more quickly,

more securely and more conveniently; the launching of new products and new

services occurs more quickly and more often; and so on.

Still, many managers – particularly organizations’ most senior executives –

remain skeptical about the value of any digital investment, let alone a large-scale

digitalization initiative. When you think about it, this skepticism is quite

understandable. Achieving success with digital investments can be very challenging,

especially when an investment: depends on new technologies; introduces new

products or services; requires people to change their perspectives and behaviors;

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disrupts established procedures; is directed toward an immature market space; etc.

Under-performing – and failing – digital investments are not rare events, and any

manager burned in the past by an underperforming digital investment is likely to view

new digital investments with considerable skepticism. Competitively, the logic behind

a new digitalization initiative may seem clear; pragmatically, however, digital

investments are too often seen as risky, bottomless money pits likely to produce

meager, if any, long-term financial returns.

Unfulfilled expectations regarding past digital investments produce three

negative outcomes. First, when anticipated benefits do not materialize, the

competitive positions sought are not attained. Second, most decisions to fund a

specific investment proposal invariably means that one or more other investment

proposals will not be funded. The higher a proposal’s cost, the higher are these

opportunity costs. Third, any manager disenchanted by past digital-related

investments is less inclined to believe the business cases offered in support of new

digital investments. Over time, it becomes increasingly difficult for proponents of

digitization or digitalization proposals to develop persuasive business cases.

In an ideal world, the realized financial returns from a funded investment

proposal exceed, not just achieve, the proposal’s promise. Realizing a proposal’s

promised benefits demands attention to two related activities: building a persuasive

business case, and mindfully overseeing the implementation of the funded proposal

such that the proposal’s promised benefits are realized. Our objective is to enable

readers to excel in both of these activities. To begin this journey, we describe the

three most common reasons why digital investments do not realize their promised

benefits:

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 The benefits were never there.

 The benefits were overstated.

 Inadequate efforts were taken to achieve the benefits.

As each reason is introduced, avoidance actions are presented and linked to the ideas

being presented in this part of our book.

The Benefits Were Never There

Sometimes, a proposed digital investment is ill-conceived from the start. In

other cases, an idea has considerable merit, but is inadequately thought through.

Problems arise for numerous reasons. The competitive action might be ill-conceived

because of flawed understanding of the market space or of participant preferences,

an ill-conceived profit model, insufficient or absent capabilities, etc. Alternatively,

the problem might lay with the enabling digital technologies: critical technologies

might not yet work as promised, the requisite internal technology capabilities might

be lacking, a poor understanding of a provider’s offered services or capabilities may

exist, etc. And, while a proposal’s strategy and enabling-technology might look fine

when initially considered, key assumptions and predictions built into the proposal can

turn out to be dead wrong.

A well-conceived investment proposal possesses a clearly articulated strategic

focus, is supported by a business case that describes how these aims will be achieved,

and is based on realistic assumptions and predictions. These issues are addressed

through discussions of the strategic focuses commonly applied in framing digital

investments, six value pathways through which digitization and digitalization

investments most often achieve their strategic aims, and the critical assumptions and

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techniques involved in fashioning and monetizing an investment proposal’s business

case.

The Benefits Were Overstated

Even when proponents of a digital investment proposal have identified

meaningful strategic aims and articulated how these aims will be achieved, they can

then err by overstating benefits, understating costs, or both. The psychology behind

such behaviors is pretty straightforward: “Our calculation of a $250,000 net benefit

might not be high enough. Why don’t we fudge the numbers a bit in order to bump

up to a $400,000 net benefit? If the project unfolds as we think it should, this higher

target is certainly achievable. Let’s just be really confident when selling our ideas to

senior management.” The problem, obviously, is that it might be very difficult to

achieve a $400,000 net benefit – an outcome that senior management now not only

expects to see but considers achievable.

How do you go about building a compelling, yet realistic, business case? What

should you be looking for in assessing a business case that has been proposed to

you? We will be describing how persuasive business cases are built and how the

benefits flows and costs flows associated with these business cases are monetized.

Inadequate Efforts Were Taken to Attain the Benefits

Perhaps the most common mistake finds the managers charged with

implementing a funded proposal failing to effectively carry out all the activities

necessary for promised benefits to be fully realized. Seemingly, the implementation

of almost every funded digitalization proposal turns out, after-the-fact, to be much

more challenging than originally thought. If critical implementation activities are

executed poorly, inadequately resourced or ignored altogether, you can be assured

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that some promised benefits will not be realized, that some specified costs will be

understated, and/or that some unspecified costs will emerge.

We provide discussions regarding the activities that need to be taken in order

to increase the likelihood that a digital investment’s promised benefits will be

realized. Specifically, management-oriented discussion of implementation planning

and project management planning are provided.

A Recap and Look Ahead

Today, an ever-increasing portion of organizations’ activities have been or are

in the process of being digitalized. Consequently, it is difficult to identify an executive

or manager in an organization that has not had to develop the business case for,

champion or approve a digital investment. The chapters comprising this part of our

book should enable you to build a persuasive business case for a digital investment

proposal, to know what to look for in assessing someone else’s investment proposal,

and to understand what is involved in implementing a funded proposal. We conclude

this part of the book by offering senior executives a set of high-level principles to be

implanted across their organizations to increase the likelihoods that well-reasoned

digital investments will be funded and that the promised benefits from these

investments will be realized.