With the mission to deliver digital value, new KPIs – Key Performance Indicators – must be identified, defined and used to measure in a fast-growing and ever-changing environment. Those new KPIs were the topic of the presentation given by Paul E. Proctor, at the Gartner Symposium/ITXpo which took place in Barcelona from November 5th to 9th.
"Digital business, models and KPIs are hot topics as many enterprises and industries are undergoing digital transformations. Digital business is actually the blurring line between digital and physical and it usually allows the creation of new business models" underlined the Gartner analyst. Yet, according to the latest CIO Survey, almost half of respondents currently have no metric allowing them to evaluate the performance of their digital business.
The first question CIOs need to answer is "why go digital?". Is it to keep up with competitors? If so, why them specifically? Is it to improve their current business model and business outcomes? It can also allow companies to avoid market disruption and create new sources of revenue, as digital can produce higher quality revenue, which is repeatable, predictable, creates higher margins and has lower costs. If creating is the first step, one must not forget to measure these initiatives and their effectiveness.
Paul E. Proctor and his fellow Gartner analysts listed three major ways to measure your digital business, whether it is by its business outcomes – revenue, reduction in costs, etc –, benchmarks & maturity, and finally by setting digital business KPIs. To illustrate the first measurement tool, the expert first shared the example of English retailer Tesco which was able to cut its refrigeration costs by up to 20% across 3000 stores, thanks to the use of digital. The benchmark solution consists in comparing your business to your peers in order to identify gaps and opportunities for improvement: it allows you to assess your digital maturity. "Finally, how can you describe your digital journey? How do you report how far you've gone?" asked Mr. Proctor, the answer lies in Digital Business Key Performance Indicators.
The Digital Business KPIs
"Establishing metrics requires having a clear digital journey scope" highlighted Paul E. Proctor who then listed the three different digital business perspective: IT metrics, in order to optimize IT, revenue metrics and leading indicators meaning digital transformation, and business metrics, aiming at business optimization. The expert also warned the CIOs about "full digitalization", which may result in customer satisfaction going down. "There are limits that you need to understand, and you must be careful not to go further than the balance point. More digital is not always better. There are many moving parts that motivate your decisions" he added.
He also insisted on the importance of setting one's digital ambition: "Does your digital business strategy aim at improving productivity and existing revenue? Or does it aim at delivering a new customer experience? Or is it to create completely new business models?" This digital ambition can therefore be split into two separate strategies: Digital Business Optimization and Digital Business Transformation. "Digital Business Optimization adds significant value without changing business model, which can go from increasing revenue to enhancing customer experience to increasing asset utilization" explained Mr. Proctor.
Creating new business models
If optimization doesn't mean creating new business models, digital business transformation does as it leads to net-new revenue. Depending on this industry, Gartner lists 6 ways to create new sources of revenues. One can sell existing digital assets, digitalize the products or services, sell metered revenue, conclude contract based on shared business outcome, run a platform business or move into adjacent and new industries. "The different ways to create new revenue are listed from the least transformative to the most transformation" underlined the Gartner analyst who added that these new sources of revenue require different metrics than the ones previously described. Some examples of leading indicators include the number of connected assets, the volume of data, of activity/production when it comes to Connected Services Revenue, or the number of providers and consumers, the growth rate of providers and consumers, and the number of sides in multisided platform, when it comes to Platform Business Revenue.
Paul E. Proctor's presentation ended with the traditional Gartner recommendations, starting with the select of metrics that support business strategy and will drive desired results. It is also crucial to identify type of metrics that fit in with leadership team's style and to figure out what is possible to measure before picking from industry benchmarks, business cases and digital business KPIs. He concluded: "Simplification is also a key word here: choose KPIs you can measure easily and are easy to understand. Also, don't try to build a KPI hierarchy, but recognize that executives will want a representative subset. Finally, do not forget about balance points."