Digitalization is prompting widespread, and often radical, change in business models, but CFOs play a key role in ensuring continued funding for innovation and growth by defining, measuring and demonstrating the value of digital initiatives to the business.
CFOs need a process for discovering where digital value is created within their organizations
In the 2018 Gartner CEO and Senior Business Executive survey of 460 executives from large organizations around the world, business leaders put digital income streams at 39% of revenue by 2020 — up from 29% of 2017 revenue. But demonstrable value doesn’t always translate into funding, often because organizations lack a shared view of how to measure the costs and value of digital initiatives.
“CFOs need a process for discovering where digital value is created within their organizations,” says Sanil Solanki, Managing VP, Gartner. “Looking at technology spend in isolation without connecting it to the value projects can provide will stymie lucrative streams of future digital revenue.”
Define digital revenue
Before CFOs can communicate digital business value to their senior executive teams, they need to make sure everyone is speaking the same language. Some executives associate “digital business” with e-commerce; others don’t consider a revenue stream to be digital unless the entire process surrounding it is digitalized and automated.
Business partners can see the direct impact of IT spending and offer a clear business case for maintaining funding for digital initiatives
The Gartner survey showed that 62% of business leaders recognize digital revenue as its own distinct category, regardless of whether they proactively measure or publish that revenue.
Among those who do recognize digital revenue, definitions vary:
- Sales made as a result of digital marketing campaigns (19%)
- Nondigital products sold online (24%)
- Digital products/services sold or delivered offline (25%)
- Digital products/services sold and delivered online (32%)
If yours is one of the 38% of organizations that don’t distinguish digital revenue from other revenue streams, start by analyzing your organization’s digital strategy to determine exactly how value is being created through digital channels. From there, map and measure the flow of value generated by these activities to identify every possible digital value stream.
Remember, a business initiative doesn’t have to be fully digitalized to create value from its associated technology spending. Digital revenue can come from any income source that is enabled or made possible by digital technology, whether the end product is digital or not.
Match IT costs with digital revenue streams
For a growing number of organizations, digital information technologies are integral to the creation and delivery of their products or services. This means IT accounts for a large percentage of business operating costs (if not the largest). If finance leaders don’t connect these costs with the digital value they produce, CIO and CTO budgets will be the first to suffer.
That’s why recognizing and defining digital revenue is so critical.
“Once an organization understands where its digital value is coming from, the CFO can then apply the matching principle of accounting to match up all costs, including digital ones, to the revenue streams they support,” says Solanki. “Armed with this type of financial reporting, business partners can see the direct impact of IT spending and offer a clear business case for maintaining funding for digital initiatives.”
For future technology budget forecasting, these cost-to-revenue matches can be used to assess upcoming spending decisions in terms of their potential impact on digital value and revenue streams. Then, CFOs can follow up and continue to measure the actual impact to prove the investment’s value.
Measure digital value
When assessing, measuring and communicating digital business value to senior executives, CFOs can take these steps to ensure that IT and leadership are on the same page:
- Connect the dots between tech spend and revenue streams. By matching IT costs with revenue, you show that all digital spending — not just e-commerce costs — can deliver measurable results. This enables correct funding of IT costs.
- Use digital KPIs to attribute current performance improvements to digital spending. Analyze any of the organization’s existing revenue streams that are enabled by digital technology, and identify how the associated tech costs can and do improve performance against earlier forecasts by creating and communicating digital KPIs.
- Craft an income statement for digital to reports on the costs, benefits and revenue generated by digital activities. This should be included in management reports that go to both business leaders and IT to take technology costs out of their silo.
Ultimately, the best thing a CFO can do to demonstrate the value of digital initiatives is to frame technology costs as an essential component of a digital business model or line of business. Although digital business activities are never a guaranteed success, reporting on digital growth, improvement and revenue makes it more likely that leadership will understand its value and give CIOs the necessary budget to fund innovation and growth and deprioritize initiatives that won’t move the business forward.