Digital transformation is hugely important and extremely difficult. No matter what form an organisation’s transformation takes, it’s bound to introduce new and unanticipated challenges and costs even as it leads to positive long-term outcomes.
While increased challenges and costs are a normal part of digital transformation, they can trigger C-suite leaders to recalibrate their thinking of transformation initiatives and ask to see immediate proof of ROI. When this question inevitably comes up, leaders tend to look for obvious ways to deliver a positive ROI no matter how early in the transformation process they may be.
Too often, the “obvious” solution is to reduce staff whose work is scheduled to be made redundant by new digital processes. In reality, though, such a simplistic solution to the complex problem of calculating the ROI of something as complex as a digital transformation rarely works. In fact, in our experience, immediate downsizing of experienced staff is one of the biggest possible ROI killers in digital transformation initiatives.
Here’s a look at why, and what organisations can do to realise a sustainable and positive ROI.
Why downsizing tanks the ROI of digital transformation
The simple reason downsizing ends up costing more money than a company will save is that it causes an immediate and dramatic loss of institutional knowledge. We tend to underestimate the value of institutional knowledge, mostly because it’s not often discussed and it’s nearly impossible to quantify. However, underestimating its value can prove expensive in short order.
What usually happens is that, when transformation initiatives aim to digitise processes, internal leaders assume they no longer need employees who used to handle those processes manually. These people are downsized. Short-term ROI numbers look amazing: the savings resulting from a change in headcount makes the digital transformation initiative look like an immediate success.
In reality, though, what typically happens is that, shortly after downsizing or right-sizing a particular team, the organisation realises it still needs certain key skills and that those skills were directly provided by the people who were let go. If the organisation is lucky, it’s able to rehire these people – as contractors – at a significant premium. If not, the downsized workers aren’t interested in returning and the organisation ends up paying their old salary (or more) for a less-experienced person to fill the role.
All told, we usually see it as 30% to 50% less expensive to maintain existing staffing levels during digital transformation initiatives than to develop new employees. Let’s take a look at why.
The ROI-positive alternative to downsizing
A more cost-effective alternative to downsizing current staff following the engagement of a digital transformation initiative is to retain and reskill your best employees. While you may not need all of the skills you have on staff today, it’s rarely wise to let that talent go when you don’t yet know what the final state of your organisation will be post transformation.
We are constantly amazed at how adaptive teams are to new challenges and opportunities when given the chance to make meaningful contributions in new areas of the business – and they do so with a base of institutional knowledge that can’t easily be recreated.
What’s more, when you maintain your existing workforce, the only cost you incur is that of retraining. You won’t be training for corporate, culture, or industry knowledge, as you would with a new employee. Once your existing employees learn the skills necessary to do the work your organisation now needs, they’ll be able to execute more efficiently than new employees would thanks to their deep institutional knowledge.
Today, with the presence of employer review sites like Glassdoor, it’s important to remember that your current and former employees have a voice and that voice can and will impact your reputation. Get enough negative reviews about how you handled the execution of a strategic initiative, and you could find yourself struggling to recruit the talent you need to get your new digital processes off the ground. This is an all-too-common situation where nobody wins.
ROI-positive digital transformation demands a big-picture view
Even in the best of times, calculating the ROI of a digital transformation initiative can be difficult. The amount of change introduced into a business during these initiatives is substantial. When the alternative to transformation is risking your relevance with customers, partners, and employees, taking the time to invest in the upfront work and the complex management needed to successfully execute the transformation will be worth its weight in gold as the business executes in new ways.
While the most successful digital transformation initiatives define goals from the beginning, many initiatives launch without any clear, measurable goals. If this describes your organisation, take heart: it’s not too late to calculate ROI. Keep in mind, though, that to do so in a way that accurately reflects your financial reality for the long term, you’ll have to look beyond the simplistic short-term measure of cutting costs by downsizing your staff.
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