A few months ago I was talking with two friends of mine who are both CEOs of very successful FinTech companies that offer digital banking solutions to banks and credit unions. I asked them what were some of their biggest challenges and frustrations in dealing with financial institutions. One that was near the top of both of their lists was the issue of trying to demonstrate an ROI on digital transformation investments. Prospective customers are reluctant to buy their products unless they are assured of a positive financial return.
I can totally relate to that because I’ve often been asked some variant of the question: “What kind of return on investment can we expect on this digital banking project?” Sometimes I’m asked the question in reference to investments in specific technologies, such as improving mobile banking functionality or introducing a mobile/online deposit account opening system. I’ve also had it posed more broadly in terms of expected returns on a broad (and often undefined) digital transformation effort.
It’s not that hard to see where the question is coming from. Business leaders have been conditioned to pursue a ‘disciplined’ approach to decision-making. They want to understand in advance the potential revenues and costs associated with any new venture. Asking about a pro forma ROI is a perfectly reasonable and responsible question in their minds.
Risk aversion also plays a big factor in this. People tend not to want to risk looking foolish by supporting a project unless they are fairly certain it will be a winner. Traditional organizations often have multiple layers of departments and committees and processes that are designed to prevent the allocation of resources to any projects that can’t demonstrate a reasonable pro forma return.
Unfortunately, ROI isn’t a concept that can be readily applied to transformative investments (meaning investments related to making substantive changes to the company’s existing business model). It can also be hard to apply to more narrowly-focused projects, such as changing mobile banking platforms.
By their very nature, transformative investments often mean that you’re doing something totally new. Something that your company has never done before, and consequently you can’t draw from past experience to develop a reasonable projection of future results.
If your company has never deployed a digital opening solution for deposit accounts before, how can you possibly project the number and quality of new accounts that you might get? If you’ve never had any kind of customer analytics platform, how are you going to forecast potential new revenue from the more effective targeting of customer needs? If you have no experience with an automated loan underwriting system, what are your expectations of improved service delivery going to be?
The ROI paradigm works best when the project being analyzed has a well-defined cost structure and past institutional experience from similar projects that can help with the forecasting of the drivers of future revenue. If your project is closely related to something that the company has done before (or that others have done and shared their results), then you may have some guidance as to what you might expect to achieve. But most of the time with digital investments you don’t have that luxury of experience. And if you’re doing something genuinely innovative, then there are no guideposts for estimating the results – it’s just pure guesswork. For those bold enough to put their credibility on the line, Excel is a tool that can give authoritative-looking results regardless of whether or not the underlying assumptions are grounded in reality or are just pure fantasy.
Another issue is that ROI is usually based on financial results, while the ultimate ‘success’ of a transformation project may be defined by non-financial metrics such as:
- Customer satisfaction scores
- Mobile adoption rates and app store ratings
- Increased customer engagement and net promoter scores
- Reduction in application abandonment rates, or increased customer retention
- Number of service issues resolved through digital channels
Purely financial metrics for an ROI analysis on a digital banking-related investment would generally focus on things like earnings derived from increases in outstanding balances (which is a function of the number and quality of new accounts opened). Or improvements in relationship profitability. Or reductions in costs through increased back-office efficiency. But these types of financial metrics can be difficult to estimate for many types of new technologies, services, and processes.
To help illustrate this, let’s take a look at a common type of investment: a new software platform for digital deposit account opening. The benefits of this investment would likely be measured in financial terms by increased revenues from new deposit balances, which in turn are based on the numbers and quality of new accounts opened.
Not only will these be difficult to forecast, but the results will be heavily affected by factors beyond the quality of the software selected. For example, the number of accounts opened will depend on a myriad of factors including:
- The account opening workflow. A poor workflow design, bad user interface, or a process that takes too long will result in high abandonment rates.
- The competitiveness of the deposit accounts offered in terms of features, pricing, and their ability to address the financial needs of the customers.
- Where and how effectively the solution is marketed. For instance, will it be a part of a targeted digital ad campaign, actively promoted via content marketing or social media, or will it just be an ‘open now’ link on the bank’s website?
The quality (or profitability) of the accounts opened will depend on factors such as:
- The demographics of the customers that were targeted.
- The types and pricing of accounts offered. Leading with a high-rate CD, for example, may just generate a large volume of low-profit accounts from rate shoppers.
- Whether or not the bank has an effective, extended onboarding process to ensure actual account usage and increase overall levels of engagement with the bank.
It’s often the case that the returns on the investment will ultimately rely on the quality of execution across multiple departments across the company. It would be extremely difficult for anyone to objectively and accurately forecast success given the reliance on so many factors outside the technical scope of the project. There are just too many moving pieces, any one of which may work very well or very poorly.
Another consideration that must be kept in mind with respect to digital transformation investments is that a traditional ROI analysis focuses on the incremental revenues/expenses associated with the investment. Put another way: the project results are viewed as an addition to the existing revenue base. The implicit assumption is that revenue streams from current business will continue into the future whether or not the investment is made.
This assumption ignores the more existential reality of digital transformation investments. Their purpose is not just about earning additional revenue by attracting new customers, or increasing the engagement and satisfaction of existing ones, or improving operational efficiency. They are about defending the existing customer base against more innovative competitors who are trying to steal them away. You simply can’t assume that your current customers are going to stick with you if you do not aggressively work to improve the customer experience and introduce innovative new features and technologies.
If your company is struggling to move forward with important new digital projects, it’s time to break away from the tendency toward ‘paralysis by analysis’. Digital investments are essential to a company’s long-term survival and the longer you sit on the fence waiting until you can ‘make the numbers work’, the further behind you’ll become. Remember – the rest of the world isn’t sitting still.
It is important to assess how effectively your transformation projects achieve your goals, but that evaluation is often best performed after the project has been deployed. You can use the information gained about what worked and what didn’t to better anticipate the potential benefits and pitfalls of future projects.
If you haven’t created a formal digital strategy yet, then the first step should be to create one that highlights the gaps between where you are today and where you need to be to remain competitive. Do your research, and use methods such as Design Thinking to help uncover innovative solutions to genuine customer needs that can help differentiate and grow your company. With that as the starting point:
- Develop the list of investments needed to fill those gaps
- Prioritize those investments in terms of the impact they will have on your customer base, competitive position, and/or operational efficiency
- Identify resource needs and sources for each project – financial and human.
- Develop success metrics for each project. They may be qualitative or non-financial in nature, but it’s important to have something to demonstrate progress.
Then start working your way through the list. Wherever possible use Agile development concepts to quickly get a prototype of the product, service, or process into circulation to begin to test its impact and measure its benefits. It’s likely that not everything will work out as you’d like at first, but think of it as an iterative process that will unfold over time in a series of short development ‘sprints’. The company will gain valuable information and knowledge from these experiences as levels of understanding, skills, and processes continue to improve. And you’ll gain confidence in your ability to drive meaningful change in the face of uncertainty.
Keep in mind that the world is changing very quickly. The company’s needs will not remain static, so priorities must continually be reviewed to make sure they remain relevant.
Digital transformation is a journey rather than a destination.
