Jon Watts shares an article on digital investment and how to approach it.
Investing in digital capabilities is essential for most businesses to find new paths for long-term growth and to compete with digital-native companies. However, the pace of technology change is faster than ever, the cost of capital remains elevated for some companies with interest rates higher than they have been in years, and inflation is weighing on margins. These factors make it vital for CFOs to be able to rigorously vet these investments.
Unfortunately, some CFOs remain skeptical of digital spending because of a perceived inability to accurately estimate costs and measure returns. To overcome this barrier, it is more important than ever to distinguish between IT and digital investments in order to properly align metrics and KPIs to make the right decisions about whether a digital investment will drive long-term value. CFOs may also need be aware of common investment decision pitfalls and consider enhancing the current investment decision process to maximize return on investment.
How digital investments differ from IT spending
When considering digital investments, CFOs may need to see them as part of a continuously evolving digital strategy that adapts to market conditions and disruptions, rather than one-off fixes. Digital investments can also enable greater intimacy with customers and the customer’s customer and connect with the P&L statement. Think of it in terms of digital business building. How does this differ from IT spending? It’s a matter of focus.
IT: Focused on improving and automating internal processes and systems with an emphasis on reducing costs
Digital: Primarily concerned with generating new businesses, products and services and growth opportunities
IT: Focused on a business’s current state and sustaining the operating model
Digital: Focused on market externals, being the disrupter and changing how a company goes to market and creates a durable competitive advantage; enabling transformation in how a company interacts with customers, clients or stakeholders and the products and services they buy
Both types of investments can run into the same pitfall: insufficient corporate finance rigor. But even then, the cause is different. IT spending decisions tend to prioritize affordability, so cost trumps all. Digital investing is often driven by the need to act quickly with insufficient corporate finance input around the size and pace of outlays and quantification of returns. In fact, this me-too mindset, which we currently see around large language models can hamstring efforts to drive breakthrough returns right out of the box.
Key points include:
- Driving digital differentiation
- Digital spending
- Manual adjustment of financial reporting
Read the full article, How CFOs can recognize the true value of digital investments, on CFODive.com.