In the previous chapter, we explored how to create a business case to win the right to carry out the digital transformation project. Now comes the hard work: you don’t just need to get the project underway, you need to secure and maintain ongoing support.
For this to happen, you’ll also need to prepare ways of convincing those around you that the project is worth in the long term. For this, you'll need data.
Change the Way Your Organization Measures Success
As we’ve talked about throughout the course, a digital transformation project often has a very long-term payback - a major business shift. It can take three to five years to see success.
To make your challenge even more complex, as the World Economic Forum put it in a White Paper a couple of years ago:
“Many companies have discovered that traditional financial key performance indicators (KPIs) are no longer effective at measuring the success of a digital business. According to McKinsey’s Digital Quotient analysis, fewer than 15% of companies can quantify the return on investment of their digital initiatives.”
In other words, your organization’s senior stakeholders have to:
Wait for years to see the return on investment in your project.
Accept that the digital transformation project could cannibalize revenues and profits from their existing business models.
Understand that the traditional metrics they use for gauging the organization’s success might not show the benefit of the digital transformation project.
Nothing like a challenge, right?
Use Digital Traction Metrics to Measure Success
Part of the solution lies in defining more appropriate digital traction metrics, as used by leading Venture Capital and Private Equity funds, such as General Atlantic, Monashees Capital, DFJ and Andreessen Horowitz.
In this equation, scale refers to the numbers of:
Monthly growth in registrations
Organic user acquisition
Active usage drills a little deeper to include:
Active users - (daily and monthly)
Ratio of new users to repeat users (or customers)
Number of repeat users (or customers)
Finally, engagement encompasses:
Net promoter score (NPS)
Customer satisfaction index
Cohort retention on metrics specific to the business
Time on site
Customer concentration risk
Churn or exit rate
Photos or videos uploaded, shared, viewed
Number of likes and shares
You’ll see from this list that not all of these elements are appropriate to every organization’s situation; however, the ideas behind it are drawn from studying the growth and success of some of the world’s leading digital pioneers, from social networks like Facebook, Instagram, or Twitter, to technology companies like Apple who are making the leap from manufacturing to a digital-first business model.
Measure Potential the Way Venture Capital Does
These digital traction metrics feed into crucial financial measurements that help determine how well a digital organization is performing - and act as a predictor of its future growth prospects:
CAC, which stands for cost to acquire a customer, is the sum of all sales and marketing expenses divided by the number of new customers.
LTV, or lifetime value of a typical customer, is the average monthly recurring revenue (MRR) multiplied by the average time a customer remains a customer.
LTC:CAC ratio, which is derived from the first two, is a crucial measure of time to profitability and cash flow.
Months to recover CAC is calculated as CAC divided by the average MMR.
Your digital transformation project will require a new set of metrics to measure success. Silicon Valley's investment machine assesses success in challenger organizations.
Apply the digital traction formula to assess potential future value:
Digital Traction = Scale x Active Usage x Engagement.
Adopt the new financial metrics based on cost to acquire customers (CAC) and customer lifetime value (LTV).
So far, in Part 2 of this course, you’ve been learning how to win (and to maintain) support for your digital transformation project from a range of different stakeholders within your organization. There’s just one more piece of this jigsaw puzzle left to learn about: How can you protect the project in the face of changes to senior management? On with the next chapter to find out!