How to Measure the ROI of Finance Transformation

Summary

In this edition, we will be covering the following items:

1. The challenges of measuring ROI of any digital transformation initiative

2. Frameworks for defining success and making smart investments in your digital capabilities

Why It’s Hard to Measure the ROI of Finance Transformation

Investing in finance transformation can be daunting for a finance leader. You are going to ask your team to spend quite a lot of time, effort, and money to change your organization, hopefully for the better. Along the way, you have to navigate uncertainty, complex vendor relationships, and numerous technical and organizational trade-offs. To make matters worse, measuring the ROI of all this effort can be challenging:

1. Not All the ROI is Directly Financial: Improving the accuracy and timeliness of financial reporting doesn’t have an immediate financial impact for the company. Saving your finance team time and effort can have cost savings, but those usually are not enough (on their own) to justify the risk, effort, and time investment.

2. Not All Stakeholders Experience ROI Equally: Technology projects tend to involve wide cross-sections of people from different departments across the organization. This means finance leaders have to ask for (sometimes large) investments by other teams for a project which can have an asymmetric payoff.

3. Stakeholders At Different Levels May Experience ROI Differently: Some projects may be empowering to the leadership team (for example, real-time financial analytics), but require large upfront investments by teams that may not directly benefit from the new tooling (the finance analysts who need to reconcile the data).

4. Ultimately, Not All the ROI is Easily “Provable”: Many investments we all make have ROI that can be difficult to conclusively prove. It’s hard to prove that taking your vitamins has prevented you from becoming ill. This challenge can take multiple forms:

   1. Non-Event Value: This is the value of something that prevents a negative event from happening (for example, having to re-state financials).

   2. Optionality: This is the value of increasing your flexibility and options for the future, even if the immediate payoff isn’t clear (for example, building infrastructure to support future advanced analytics projects).

   3. Insurance Effect: This is the value of something that mitigates future risk or protects against uncertainty (for example, having data quality monitoring in place to ensure system integrity).

Making Smart Investments: ROI-Focused Digital Transformation

Having a systematic approach to measuring digital transformation ROI will help your team define success and increase their odds of getting there:

1. Quantify Whenever Possible: While not all benefits can be quantified, it’s important to quantify as much as possible. This will help with goal setting and with measuring the return on investment (financial and otherwise).

   1. Cost Savings: Look for opportunities to create cost savings, by reducing overhead, TCO (Total Cost of Ownership), and consolidating systems.

   2. Non-Financial Costs: Can you increase efficiencies (and give back time that could be better spent elsewhere)? Can you reduce reporting latency? Can you measurably increase reporting accuracy (reducing the frequency of mistakes)?

2. Define the Unquantifiable: Where it isn’t possible to directly quantify impact, it is still important to define the goal (return) we want to achieve with our digital transformation efforts.

   1. Risk Reduction: What risks can you mitigate? Where can your systems and processes be less exposed to risks and failures? What reputational and decision-making risks can you reduce?

   2. Increased Optionality: What new capabilities could you empower your team with? What analysis can you not do today? What questions could you answer?

   3. New Opportunities: What new opportunities would be open to your team with increased capabilities? What opportunities and decisions could you now support with data?

3. Measure the Cost of Inaction: What is it costing your organization to stick with the status quo? How much more might it cost you to delay making change? What strategic goals are you unable to achieve without acting? Answering these questions will frame your thinking and help you define the goals (ROI) you need to on your finance transformation journey.

   1. Ongoing Risks: What risks will your organization continue to be exposed to?

   2. Overhead and Costs: What expenses will your organization continue to incur?

   3. Reduced Optionality: What strategic initiatives are blocked or hindered by your current technology and capabilities?

4. Ground ROI in Broader Business Impact: When your team and your stakeholders think about the investments you will make in digital transformation, it’s important to get all parties thinking about the broader organization.

   1. Shared Goals, Shared Investment: Your goal is to align all stakeholders to the organization’s broader objectives and prioritize initiatives that contribute materially to them. By framing your objectives in these terms, you make it easier to measure success and win buy-in across the organization.

   2. Make Investments with a Long-Term Horizon: When making investments (in almost anything), it can be helpful to have a longer time horizon. By making sure to think about the second and third order effects of your digital transformation, you can shift your organization’s thinking about this investment. Approaching the work with a long-term mindset will empower your team to take calculated risks that may return a pay-off further in the future.

Setting Your Team Up for Success

Thinking carefully about what you want out of your investments in finance transformation is your highest leverage activity. When you know how your organization needs to measure the benefits and ROI of an initiative, it becomes much clearer what levers to pull and what initiatives are best left undone. You will need to align your partners around making investments of time, money, and effort – so being clear about their return on investment will help you get the buy-in you need to make a real impact in your organization.

In the Next Newsletter

We will learn about the importance of data quality for FP&A and how to use Power BI to help.