Digital: The Structure of Digital ROI

This is the 9th entry in a blog series about enterprise digital transformation, with an emphasis on API programs.  Discussion is also occurring in Apigee Community.

Recently I've had the opportunity to debate the ROI of digital capabilities, especially API platforms, with executives mired in traditional ROI justification governance.  They are stuck trying to unlock new ways of doing business, while justifying the acquisition of platforms in terms of ROI for that specific expenditure.  

Here I try to synthesize research from the likes of MIT, CISR, Harvard, consultants and analysts, along with my own observations from successful customers, into a succinct point of view I hope is useful for CFOs and executives advancing their digital agenda.  This entry is not about API platforms, but about the digital enterprise in general.  For guidance specifically on allocating funding in your digital initiative, please refer to Funding Your Enterprise API Program.

Shifting Foundations

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.

A Digital Investment Model

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:

1. 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.
2. 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.  At massive scale, enterprises like VW (manufacturing), Diageo (marketing), Unilever (product segmentation), Apple (consumer electronics), Amazon (retailing), and Fast Retailing (fashion) are good examples of platform-based enterprises.  

The ROI on the product-specific modules is based on risk, where each product has short a 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, but 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.

Innovating into Profitability

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.

Profitability becomes a secondary effect of this configuration, derived from short-lived, unpredicted, successful adoption of specific product variants.  As soon as it detects successful adoption using the capabilities of the platforms, the enterprise 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.  

A Platform of Platforms

From a due diligence perspective, the enterprise architecture for the platform of platforms should end up containing sufficiently configurable and loosely coupled components, such as:

• A revenue generation platform for billings, payments, and problem resolution;
• A customer relationship platform, including a profiling and personalization capability;
• A production platform, producing the core product in a highly modular fashion (insurance policies, cars, software, fashions,, services, etc.);
• A customer experience platform, including all digital and marketing experiences;
• A partner / supply chain / channel management platform;
• An API platform  to easily connect the platforms and connect to every external participant in the value chain, all the way to the individual customer and employee.

Once this larger perspective is accepted by the board and executive suite, other funding decisions and ROI expectations tend to align more easily.  

There is a corollary to this, in that well-tuned and instrumented enterprises running on platforms paradoxically become better able to predict successful products, design more successful marketing campaigns, and forecast profitability more reliably.  But rarely is this success coupled with a reversion to an old way of doing business.  The cultural change that accompanies the evolution to a digital enterprise remains a competitive advantage and allows the enterprise to continue to behave in an agile, innovative manner.  

Does this resonate with your experience?  How are these ideas unfolding in your enterprise?