How to measure success in the digital age
To measure the success of their digital transformation, enterprises need to look beyond traditional financial key performance indicators and focus on digital traction metrics.
Digital traction metrics is one of four areas we focus on as part of the digital enterprise cross-industry theme. The other themes we examine are digital business models, digital operating models, and digital talent and skills.
Many companies have discovered that traditional financial key performance indicators (KPIs) are no longer effective at measuring the success of a digital business. Fewer than 15% of companies can quantify the return on investment of their digital initiatives, according to McKinsey’s Digital Quotient analysis.¹
Enterprises unable to measure the success of their digital initiatives should be turning to digital traction metrics, which provide insights that go beyond the information on a company’s 10-K statements.
Being able to measure digital traction – and find ways to boost it – is important for both digital disruptors and established incumbents for two key reasons.
- High levels of digital traction can benefit a company’s performance in a number of ways. For instance, a high net promoter score (NPS) would mean that the cost of marketing falls to zero and, in the case of a peer-to-peer business model, service costs could also approach zero.
- Digital traction can enable companies to increase their valuation, because digital enterprises have more scalable, more highly engaged customers than traditional, analog companies.
We have drawn up a set of key actions for enterprises to help them identify and measure the metrics that are most relevant to their business.
Companies need to measure and monitor a combination of essentially behavioral metrics, such as frequency of use, customer engagement and number of users, through which they can communicate both the popularity and the momentum in market adoption of a product or service.
Leading venture capital and private equity firms such as DFJ, General Atlantic, Monashees Capital or Andreessen Horowitz are using the following metrics (or a subset of them) to analyze the digital traction of businesses they are investing in (see Figure 1).
To truly benefit from digital traction metrics, companies need to develop the capabilities to track them in real time. They should also:
- Establish the appropriate technological infrastructure, i.e., algorithms, databases and data visualization.
- Act based on the insights gained from analyses of digital traction data.
- Create adaptable dashboards that can display real-time information for all essential company and customer metrics.
[email protected], a Los Angeles based startup, offers neuroscience-based audio services that help in increasing focus by ‘zoning out’ distractions. The company measures a dozen of digital traction metrics in real time. Based on the insights generated from its digital traction metrics, [email protected] is providing tailored solutions to its customers.
Convince your investors about your digital journey.
Research by Capgemini and MIT Sloan has found that the so-called ‘digirati’ (companies that understand the value of digital transformation) are statistically significantly more profitable (on average by 26%) than their competitors. The markets also reward them with valuations that are 12% higher.²
The findings are in line with a recent analysis looking at the market-to-book ratios for several sectors (see Figure 2), which also underlined investors’ preferences for digital leaders.
Listed corporations need to convince investors of their digital transformation. This requires solid and visionary C-level-driven communication toward investors, focusing on the long term and setting out a clear vision of their approach to digital transformation.
Digital transformation does not happen overnight. Companies, therefore, need to move away from providing quarterly guidance aimed at appeasing the investor community. Enterprises need to convince investors that they are embracing disruption, and focus on the longer term.
Providing quarterly earnings guidance is time-consuming and unnecessarily shifts a company’s focus to short-term tactics at the expense of long-term value. Several enterprises, such as Unilever, UPS, Coca-Cola and Google, have dispensed with quarterly guidance and prospered.
It is worth highlighting that one digital native in particular, Amazon, has thrived by not paying too much attention to the short-term view of City and Wall Street analysts. Growth comes before profit – the company recorded its first-ever net profit in 2002 – and all its initiatives focus on a five-to-seven-year horizon.
1. McKinsey, Nine questions to help you get your digital transformation right, 2015
2. Capgemini, The Digital Advantage: How digital leaders outperform their peers in every industry, 2012
Digital enterprise is one of four cross-industry themes (along with digital consumption, societal implications, and platform governance) that have been the focus of the World Economic Forum’s Digital Transformation of Industries (DTI) 2016 project. An overview of the DTI program can be found here.
Our in-depth analysis of the digital enterprise cross-industry theme is available in a white paper, which can be downloaded here.
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