How to Think About and Justify Digital Transformation Projects
Considerations and Constraints to Think About Prior to Action
September 29, 2020
Considerations and Constraints to Think About Prior to Action
September 29, 2020
Digital transformation is a concept that is tackled over time to eliminate transactional friction in operations and financial management, through the leverage of full or partial automation that is made possible by latest technologies. This brings practical compute power that enables ultra-granular processes to be defined as required by domain end-users. Think of them as being used to iteratively define a complete process, or even a partial one, from data collection thru all flows to reporting @anywhere. They can also drive contextual actionable alerts plus simulations for value.
One company’s ambitions will not be another’s of course and this is reflected by running costs and time consumed for the same process in the same industry being more for some than others. This is often being put down to a company’s management drive to focus on extracting costs with time savings, but going forwards this is going to become more visible to both internal and external stakeholders. The levels of productivity that can be achieved today have not been possible before now. No one really knows the true high level impact on earnings per share at a corporate level, especially when digital is applied to the more materially focused gross margin operations, compared with those more specific net margin focused activities. Both will yield an opportunity for value creation or streamlining operations.
Illustration of this point, using financial management as an example, comes from the fact that holistically over 50% of finance function time is consumed on process not management, regardless of vendor system being used. This is an important point, as on the surface all systems can output documents and reports, albeit with different levels of effort to produce them, but the real issue is not typically within applications, but in the fact that decision support and segmental reporting efforts are across multiple vendor application sub-systems. Operations are similar with the core issue being the lack of a granular interoperability between systems for value creation.
Inertia for change is well known. Daily functions suck out so much of our time that thinking about any disruption to them is something that does not seem that attractive, especially if changes could potentially have some operational impact or affect report submission deadlines. However for most digital projects one is often not replacing ERP systems but leveraging them instead, even if sub systems are from different vendors, and even if they are dependent on structured or unstructured spreadsheets as a source of data input.
Working through digital transformational opportunities requires an initial understanding as to why technologies are so different today. Why can they now drive fully or partially automated outcomes with full compliance; how is it that digital can leverage existing accounting systems or processes rather than requiring new application investments or upgrades; and lastly how can projects be justified not only in dollar terms but also in terms of protection of investment against any emergent new technologies.
Working through these:-
Primary and secondary processes simply makes the point that there are dependencies in operation. Primary ones reflect how data arrives into the system and secondary ones use that data for other tasks. Using retail as an example, point of sales (POS) flows would be primary and their secondary ones might be for reordering, HR compensation calculations etc. Many digital projects fail due to project teams working in isolation, and not recognising the need and availability of connected dependent data flows.
Complex tasks and complex processes. The former is performed by a few deep domain experienced users, with the latter being more pervasive across many people. These both require the ability to define compliant flows and very granular, dependent or parallel calculation flows.
Value creation compared with automating & streamlining processes. The intent is very different and one way to describe it is to think of it as a focus on gross margin or net margin. The returns from the former are likely to be larger as they will be applied potentially to all business transactions, whereas the latter is narrower. Also think about it in terms of releasing value that was simply too hard in the past, where typically that would require data from different sub systems to come together in some transformed format for better decision making to take place.
The intent of the above classifications is to ring fence digital transformation on a holistic basis and to provide an entry point into how to start thinking through options. Some will be given higher priority than others by you, but at least there is more confidence about the selected solution set being fit for purpose for both today and tomorrow across operations and also financial management, especially as your potential data sources are increasing on a regular basis.
Use of spreadsheets is extensive in any corporate and used to fill gaps for decision support, reporting and reconciliations, simply because most systems are too inflexible to achieve the end result. For the foreseeable future they will need to be integrated into processes and this has been made easier by some vendors by allowing reusable connection components for ease of data collection. Additionally, although isolated spreadsheets are hard to manage from an integrity viewpoint, the presence of latest data integrity management options have improved to enable the leverage of both the look and feel of spreadsheets, whilst adding tight data and version controls, thereby achieving the best of both worlds.
Other differentiating factors to consider are that some solutions are domain optimised for management accounting and operational use. These reduce the number of process steps @every stage to facilitate deployments that speed up both the overall design and also any future collaborative improvements ie it is all about the how. Specific financially related reporting examples might be rolling forecasts, reconciliations of complex balance sheet movements ie reconciliation of foreign currency reserves, multiple stock valuations perhaps using different methods simultaneously which might utilise actual costs of goods shipped to release profit. The latter inventory example would in practice also bring out major differences in execution times from systems optimised for performance using latest technologies, with the same true for any financial or operational one involving work across sub systems, meaning that proof of concept is an important part of the decision process.
Project team make up is critical. This has always been a part of change management and is important due to the departmental interconnection of staff, timeliness of dependent data flows and their relevancy. One often reads about FinTech and retail as being held up as beacons of what can be achieved under digital transformation, but one critical factor that is not often highlighted is that these were actually designed end to end as one flow with latest technologies. For example the on-boarding of contracts using say robotic process automation (RPA), exploding accepted ones into all associated accounting entries including any cost amortisation over life, and producing contextual alerts and workflows with appropriate back up content for contract management over their life.
Many digital transformation flows fail today when digital meets legacy dependencies, as they are often across different departments and this is mostly due to inflexible data handling, noting that these different stakeholders often have a very different perspective on compliance and risk. To some extent we also saw this when visualisation of data went mainstream in the form of processes not producing the right data for visualisation, nor decisions being executed by users on information that reconciled back to core financial data – if that existed at all!. All are of course interconnected and which can now be solved more easily.
Justifications, measuring success, identifying returns on investment and staffing impact through applying digital transformation to the above three areas can be a challenge as touched on above. For the office of the CFO and operations, irrespective of size of company, a large proportion of time is already spent on transactional processing meaning that it should, in theory, be very hard to introduce even more inefficiencies. It therefore makes perfect sense to allocate funds to several skunk projects to assess the results, simply because one is leveraging existing applications and the best of existing processes in a more cost effective way.
Impact on staffing is playing out. Today with so much inefficiency, and a backdrop over the years of having had to continually do more with less staff, suggests that we are in an unsustainable yet rigid equilibrium of accepting the status quo that really does need a major step change to drive us to the next level. Arguably, end to end digital transformational processes will in fact enable a deeper focus than ever before as they are now being viewed more holistically from end to end. Time will tell of course but it seems that job roles will be become more interesting and less routine as a result and it may certainly challenge existing aspects of functional management.
Digital transformation projects for operations and financial management will leverage existing application and processes through automation to substantially improve data quality, with an end result that sees transactional friction substantially reduced. This will in turn allow staff to be more productive, efficient through augmentation, or redeployed to drive other value creation initiatives. Justification to start transitioning seems a no brainer with little downside as financial outlays and risks are relatively lower than before, and end results very tangible, a fact that is becoming more visible and quantifiable to all stakeholders over time. A game changer!