How do we crack the ROI nut to drive investment in digital?

mleppitsch
Participant I

Traditional enterprise ROI calculations are usually based on addressable market models with specific characteristics: long payback periods, predictable long-term mass-market consumption and pricing strength, and seemingly efficient cost models based on high volume.

However, the emerging patterns of business success are quite the opposite:

  • shrinking horizons for which product are viable, reducing the payback period (shortened by increasingly innovative competition);
  • accelerating marketing cycles and increasingly fragmented customer segments, reducing effectiveness of each particular messaging platform, strategy, campaign or initiative;
  • digital competition launching similar products at lower prices, often using models with alternate monetization strategies.

Those legacy enterprises that are surviving and thriving now are the ones that can match this stride and are able to accelerate product innovation, diversify marketing, and reduce cost to deliver. That means the funding models have to change to enable this behavior. In particular, it helps to break funding into two components:

  • highly adaptable, multi-purpose, loosely coupled platforms that provide underlying robust fundamental business functions like quality, customer privacy, auditability, operational metrics, reliability, security, etc; and can be reconfigured quickly to produce / support new products, without reworking the platform itself. Platforms here are people / skills, systems / technologies, processes, and contexts.
  • highly product-specific modules that are lightweight, easy and cheap to build / source and launch on these platforms, with little product-specific modifications to the platforms themselves.

The ROI on the platforms is a strategic one; not operating on platforms is simply not an option going forward. Most enterprises have begun to embrace platforms for CRM, supply chain, finance, marketing, and other business areas. So the accounting is not to optimize for individual bespoke end-to-end product value propositions, but optimize for the ongoing TCO needed to operate the platforms at a level of operational excellence needed to support a rapidly evolving portfolio of products. Such successful strategies contain a small collection of multi-purpose platforms, each of which is loosely coupled to the others, and together act as a platform of platforms with little inherent complexity. Since digital is a part of every business going forward, one of these business platforms is a best-in-class API management platform (as opposed to a simple gateway).

In the meantime, the ROI on the product-specific modules is based on risk, where each product has a short lifespan, a diversity of go-to-market paths, and an unpredictable risk of failure along any combination of features and go-to-market paths. So the accounting is not to optimize for longevity, sustain pricing power, or to minimize risk of adoption at product launch. Instead, it is to optimize for ability to launch quickly at low cost, measure outcomes in real-time, adapt the product rapidly, double down quickly on successful adoption, and/or cut losses with little collateral damage.

This funding model acts as an innovation engine that generates a large diversity of products, each at low incremental cost, with rich instrumentation to detect successful adoption patterns (and/or abandonment) in real time. The engine adjusts its production processes in real time, trimming back product variants that don’t work, and doubling down in volume and diversity on those that do work.

In this configuration, profitability becomes an effect of launching short-lived, unpredicted, successful adoption of specific product variants. As soon as the enterprise detects successful adoption using the capabilities of the platforms, it rapidly scales production by quickly replicating (or scaling) the underlying lightweight product-specific modules. During that window of adoption and rapid scaling, the product has pricing power and sustains a profit margin, until competition floods in with other, more indirect revenue models or more cut-rate production capabilities. Meanwhile, the enterprise innovation engine continues to generate and launch new product variants, finding the next “winners” and scaling them as well. As the profitability window of certain variants closes, the enterprise can often sunset them, sometimes with a support model that is also a platform in itself, capable of supporting many sunset products to their end of life.

This is from a previously published LinkedIn blog entry.

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