Protecting Your Digital Transformation From Value Erosion

There’s no denying the benefits of IT transformation, but substantial risks can undermine initiatives, often leading to delays, reduced scope of efficacy, and, overtime, value erosion. Here are some warning signs, and ways to secure overall value and fulfill program timelines.

Digital transformation programs promise a wealth of advantages, but unforeseen challenges can cancel out measurable value. Careful planning and holistically evaluating your system integration (SI) partner proposals are critical steps in your transformation initiative. It’s important to clearly identify what value you’re expecting to get from your partners against the price you’re paying, as well as the risk you’re taking on as a client.

It’s reasonable to assume that with decades of experience in large business and IT transformations, the overall related risks would diminish. Unfortunately, the reality is organizations are consistently facing risks that lead to value erosion.

What is Value Erosion?

Simply put, value erosion is the decrease in value received for the cost paid. Typically, it can occur in one of two forms:

1. Cost Increases Without Increased Value: The first form of value erosion pertains to cost increases within your project without an equivalent increase in the value or activities being delivered. With project delays, for example, there are usually additional costs incurred related to resource carryover because of the timeline increase. In this instance, the absence of additional work being delivered, or future work being pulled forward to offset the additional costs, is a prime illustration of value erosion.
2. Decrease in Value Without Decreased Costs: A second form occurs when there’s a decrease in value without a cost adjustment. This can happen due to changing business priorities or project delays, especially within the build phase. As an alternative to extending the project timeline, organizations may decide to prioritize and reduce features to meet deadlines. This is especially true for organizations that may have more stringent timelines or budgetary restrictions. When reducing scope, there needs to be an equivalent consideration to the impact on the project costs, both within the current phase as well as downstream activities.

Regardless of which path leads your transformation to value erosion, the impacts of that decrease in value will adversely affect your business value case.

How Value Erosion Impacts Digital Transformation Programs

The impact of value erosion on your program can be quite drastic, both to your program costs and timeline. In fact, it’s typical for large programs to experience up to a 50% cost increase to what was originally anticipated. It’s also not uncommon to see initial deployments of transformation implementations take a delay of three to six months. Unfortunately, many organizations aren’t properly equipped to proactively manage their SI relationships effectively, especially when you consider the project team will likely be balancing project responsibilities with any day-to-day operational activities they may still be accountable for.

Even with conflicting priorities addressed, it’s still unrealistic to expect the project team will be able to match the SI’s capabilities when it comes to negotiating and rationalizing any kind of cost changes related to the value you’re receiving. This makes it even more critical to prepare for your digital transformation initiatives by evaluating your proposals, accounting for risks through contingencies, and ensuring you have clear measurements of success that you can reference to hold your vendor accountable. Failure to do so can cost you millions.

What Primary Risks Lead to Value Erosion?

Through working with many clients on their digital transformation programs, we’ve identified four common risks that contribute to value erosion on large programs:

1. Talent and Skills Gap: Selecting the right implementation partner is critical. Inadequate evaluations of your SI partners can lead to a team lacking the necessary experience or expertise needed for your program to remain on schedule. Missing necessary subject matter expertise or protections for key resources can significantly impact the output value of your workshops, design quality, and lead to over customization of your system.
2. Resource Constraints and Bottlenecks: Underestimating the necessary resources, from both the client and SI side, will result in timeline delays and decreased deliverable quality. Organizations that commonly underestimate the demand for their internal resources adversely impact their ability to contribute to workshops and provide timely feedback on key decisions and review processes. Moreover, parallel activities within timelines can also create bottlenecks, resulting in a domino effect of program delays.
3. Risk and Contingency Planning: Failure to Identify and plan for potential risks leaves projects vulnerable to unforeseen complications and budgetary concerns. Large variances in initial SI responses can be attributed to different assumptions on scope and service levels provided. The cheapest option isn’t always a cost saving: failing to properly account for assumption variance could set you up for large, unexpected spend increases related to future change orders.
4. Vendor Accountability: Failure to establish clear expectations and commitments during the contracting phase can significantly hinder your ability to hold vendors accountable. The initial contract drafts rarely include the necessary depth of transparency or commercial accountability to support proper vendor governance practices.

Understanding how to identify these risks and mitigate them early on in your transformation program is the key to reducing value erosion within your program.

At UpperEdge, we help clients build a plan for a successful program and mitigate risks to prevent value erosion. Watch our on-demand webinar to learn how to expose and mitigate program risks and explore our Project Execution Advisory Services to see how we can help your organization. 

Reprinted with permission. © IDG Communications, Inc., 2024.  All rights reserved.