A new concept to map and design value creation from digital initiatives
Most, if not all established companies across all industries are currently busy developing digital products and services. However, questions regarding the actual value created with these endeavors become louder and the need for a “Return On Digital Investment” (RODI) becomes stronger.
While working with companies on their digital business models, we often experienced that these solutions are solely rated by their potential direct revenues or cost reductions. Nonetheless benefits often arise from the less tangible benefits that these digital solutions offer. Excubate’s Digital Value Canvas offers a simple framework to quantify both the direct and indirect value dimensions of digital solutions.
The framework was initially introduced in an article authored by Excubate founding partner Markus Anding. Now we will explore the individual dimensions in more detail and establish a structured approach for the assessment of digital products in the field. Over the course of three blog posts, we will cover the three rings of the Digital Value Canvas.
In this post we will address the inner ring: direct commercial benefits.
The prevalent approach to product value evaluation
The inner ring is the core of the framework and easily quantifiable, in contrast to the less tangible outer rings. Most commonly, it is the starting point of classical product value evaluation, thus new digital products are usually first measured along this dimension.
Direct, commercial benefits are based on hard facts which thus depend little on opinions. They are therefore ideal indications for the tangible value of products as they are particularly “close to the money”. Direct revenue generation can be achieved through e.g. selling digital products for a fee, while internal cost reductions are enabled through e.g. providing remote assistance to far-away customers in order to cut down travel expenses.
The apparent dilemma of modern companies
In today’s economic climate companies experience a dilemma: According to a recent study, nearly three out of four economists estimate a new recession will hit before the end of 2021. The risk of an economic downturn forces companies to focus on profitable endeavors and cost reduction. At the same time, they must innovate and build digital business models to survive in the long run (click here to read about Excubate’s study “Innovating through the Downturn”).
However, the development of digital products is cost intense. Therefore, realizing direct revenues or cost reductions seems to be the most comfortable way to pursue innovation despite the economic downturn. This is also in line with classical product strategies, which assume that successful products finance themselves in the long run. Through regular and direct cash flows, or less commonly through the streamlining of operations, products prove their value.
Clarity regarding revenue and cost saving potentials is therefore a critical success factor in the management of digital products. In our experience companies often make the mistake to evaluate the business perspective after completing the digital product’s development. Nonetheless, it is of utmost importance to initiate the business impact calculation as early as possible, ideally already in the product’s validation phase.
Easy to measure, often nonexistent?
Direct revenues are all revenues that occur from selling the digital solution itself in any form. Direct cost reductions occur when the digital solution directly replaces a formerly, more cost intensive way of doing things. Both value drivers are KPIs in themselves, simply monitored through the fully developed solution’s direct performance. Yet in early stages (i.e. before the product development is completed) these KPIs can only be estimated. This time-consuming estimation process requires internal knowledge provided by relevant BUs. Insights from use cases and theoretical market knowledge support the process.
It leads to a clear understanding of the business potentials and enables early decisions concerning the products future. It is for that reason, that an early business potential analyses is indispensable.
Of course, from a classical management perspective these insights are not new. Direct revenues and cost reduction directly improve a company’s operational results. Nonetheless, experience shows that the majority of digital solutions in corporates generate value beyond these well discernible dimensions.
It is time to have a closer and more open-minded look into digital value generation, by exploring the middle and outer ring of the Digital Value Canvas. We will address them in our next blog post.
Start today with the value evaluation of your digital solutions!
If asked today, could you state if your digital initiative provides direct commercial benefits to your organization? If the answer is “no”, you might want to read our next blog post in which we will cover more levels on which your product might be creating value for you.