Given a series of fluctuations in the logistics industry in 2020 such as the COVID-19 pandemic, the supply chain shift, or the EVFTA coming into effect, many businesses have quickly sought digital transformation solutions to maintain their activities.
With promises of business growth, as well as revenue and new value generation, it's hard for leaders not to ask the question: How to measure digital transformation success, or specifically calculate ROI?
ROI, an abbreviation for Return on Investment, is a measure of the efficiency of a business's investment. Based on ROI, businesses can directly calculate the return on a particular investment, compared to the cost of the investment.
So how can ROI be calculated, and more importantly, what should businesses do to identify and achieve the suitable ROI goals? Let's go through the 5 steps below.
Step 1: Decide on a digital transformation goal to set an ROI goal
Businesses should focus on one digital transformation goal for a certain period of time. It should be the most important goal and have a positive effect on the entire organization. The identification of a single goal helps businesses to plan specific strategies and use appropriate measures, effectively making use of the company's existing resources.
Read more: "How to start digital transformation?"
For example, enterprise A wants to improve supply chain visibility or improve fleet productivity? If at present, the number of orders of A increases due to the demand for Tet holiday of consumers, the goal of "improving fleet productivity" will be given priority, in order to promptly deliver the goods to the customer's hands.
From the digital transformation goal, businesses can set the right ROI target. With the desire to improve fleet productivity (the goal of digital transformation), enterprise A looks to route optimization software, which saves time in creating transportation plans and increases the vehicle fill rate. At this point, the ROI goal is to measure the return on investment in route optimization software.
Step 2: Review the cost structure of the business
Next, businesses need to review their current cost structure:
- Which activities are using cost-effective?
- Which activities are not yet cost-effective?
- Do you need to invest more or cut costs in any activities?
- What adjustments does the current cost structure need to align with digital transformation goals?
Suppose, business A wants to invest in transportation management software to improve fleet productivity. This is an expensive investment, not only because of the purchasing cost but also the cost of training drivers and coordinators to use the software. Therefore, leaders need to sit together to review the current cost structure and adjust accordingly.
Step 3: Use a variety of metrics to measure ROI
Each ROI goal will need different metrics. Below is a digital ROI framework, proposed by PwC, focusing on six key areas: customers, employees, operations, safety and soundness, infrastructure, and disruption and innovation.
Step 4: Establish timelines to measure ROI
To measure ROI timely and accurately, businesses need to set specific timelines, which can be after a month, a quarter, six months or according to the project timeline.
Each metric will have its specific timeline to be measured. Enterprises can optionally measure each indicator to make appropriate adjustments or measure the entire index to evaluate the effectiveness of digital transformation.
Suppose enterprise A above has invested in route optimization software. Metrics about transportation planning time or vehicle fill rates can be easily measured after one or two projects. However, with metrics related to customer satisfaction, it will take a longer time for businesses to experience enough the benefits of a new service before rating.
Step 5: Continuously measure ROI to adjust strategy accordingly
It is difficult for leaders to conclude whether digital transformation is effective or not by looking at ROI results in a short period of time without comparing them with other time periods. Since digital transformation is a long and arduous process of change, businesses cannot expect good results in just one or two days.
Therefore, continuously measuring ROI according to predetermined timelines helps leaders periodically and consistently evaluate digital transformation performance. From there, businesses can review whether the current way of doing things is appropriate and effective to achieve the original goal or not and make appropriate changes.
Example of calculating ROI in digital transformation
Going back to the example of business A above, now try to calculate the 3-year ROI from the time A invested in route optimization software.
ROI (%) = Net profit / Investment cost
(In which: Net profit = Expected revenue - Investment cost)
* Note: The two tables below are for illustration purposes only.
Investment cost
To invest in route optimization software, business A will have to pay (1) one-off payment, (2) monthly user fees for drivers and dispatchers. In addition, A also has to train drivers and dispatchers, as well as provide each person with a 4G-service smartphone to manage order status on the software.
Here is an illustrated table of investment costs:
Expected revenue
In this case, the expected revenue is the amount of money company A saves when switching from the traditional, manual way to route optimization software.
As a result, A can save time in creating transportation plans, reduce the number of delivery vehicles, increase the vehicle fill rate, and automatically compile monthly reports quickly.
Here is an illustrated table:
Given the two tables above, the ROI of digital transformation is:
1st year ROI = 256%
2nd year ROI = 321%
3rd year ROI = 530%
Thus, route optimization software has helped enterprise A's ROI grow year by year, partly proving the effectiveness of digital transformation. Businesses have made significant cost savings by reducing the time for creating transportation plans, compiling reports each month, and optimizing the number of delivery vehicles and the vehicle fill rate.
For better ROI growth, businesses can adjust costs, for example, reduce staff training costs by taking advantage of digitized documents and video tutorials on new software features.
Conclusion
The role of ROI in digital transformation is undeniable. Through this index, businesses can know how efficiently their investment and use of capital boost their transformation activities. A high ROI shows that the business’s investment strategy is clear and going in the right direction. However, leaders also need to combine analysis and comparison with other indicators to have a comprehensive view of the business and make the right decisions.
References
1. Forbes (2020). The ROI Of Digital Transformation. Retrieved from https://www.forbes.com/sites/forbestechcouncil/2020/01/14/the-roi-of-digital-transformation/?sh=2028e86f5a22
2. Investopia (2020). Return on Investment (ROI). Retrieved from https://www.investopedia.com/terms/r/returnoninvestment.asp
3. Engage Hub. How do You Measure ROI on Digital Transformation to Drive Growth?. Retrieved from https://engagehub.com/blog/how-do-you-measure-roi-on-digital-transformation-to-drive-growth
4. PwC (2016). What’s your digital ROI?. Retrieved from https://www.strategyand.pwc.com/ca/en/media/whats-your-digital-roi.pdf
How to Calculate ROI for Digital Transformation