As we all noticed in the last year, digital projects became an urgent priority at most companies. What was amazing was the speed at which these projects got under way and completed. Urgency became the biggest priority. In normal times there would have been a dozen competing priorities but in crisis mode, it simply became speed and value. Is it possible that project priorities could be that simple even in normal times? Could it just be speed and value? I think so. Here is why.
As we all noticed in the last year, digital projects became an urgent priority at most companies. What was amazing was the speed at which these projects got under way and completed. Urgency became the biggest priority. In normal times there would have been a dozen competing priorities but in crisis mode, it simply became speed and value. Is it possible that project priorities could be that simple even in normal times? Could it just be speed and value? I think so. Here is why.
As we all noticed in the last year, digital projects became an urgent priority at most companies. What was amazing was the speed at which these projects got underway and completed. Urgency became the biggest priority. In normal times there would have been a dozen competing priorities but in crisis mode, it simply became speed and value. Is it possible that project priorities could be that simple even in normal times? Could it just be speed and value? I think so. Here is why.
As most of you know I work with private equity firms and their companies. I believe PE firms are particularly good at setting project priorities. There is no ambiguity what matters most - it is EBITDA gains. The second thing PE firms prioritize is speed. The speed in decision making, funding time, project launch, and completion. Research from the West Monroe study shows that 84% of PE firms would implement digital initiatives within the first year of ownership. Delivering digital early allows them to maximize the value from digital within the holding period.
Focusing on value and speed helps cut through inertia, indecision, and corporate politics. Value and speed get things done.
The private equity way became everyone's way in the crisis. The executive teams were clear on their priorities, decisions were made quickly, projects got approved and launched fast and results came in record time.
In normal times they would have spent months agonizing over competing priorities of strategic alignment, hurdle rates, customer satisfaction, time to value, and risk. In the crisis, everything got simpler and clearer.
Now, is it possible to maintain the same simplicity for faster value creation not just in the crisis but in normal times?
There is a handful of best practices I have seen over the years that helped companies focus on speed and value better. Here are some examples:
1) They have one or two key priorities and not 20
There is great clarity and focus when all projects are evaluated using few consistent metrics. Normally companies may have a list of priorities like strategic alignment, customer retention, hurdle rate, time to value, or risk.
Unless there is a clear hierarchy of these - and mostly isn't - projects cannot effectively know what's most important and what kind of tradeoffs to make. There is a lot of time, resources, and cost tied up working through opaque priorities. A 2016 HBS article pointed out that companies with clear priorities have higher value realization at 15% less cost.
Having 2 key priorities for example makes planning and execution much simpler. This can be value and speed like in private equity or companies may have NPS and customer acquisition cost or customer profitability vs customer satisfaction. In my experience, most businesses have 2-3 of these overarching strategic priorities anyway
Once two key priorities are identified you actually have to decide which of the two are more important. For example, if your top 2 are EBITDA gains and customer NPS, which takes priority? Are you willing to give up cash for better customer satisfaction or not? Project teams need to know what success looks like and what tradeoffs to make when time and resources get tight.
2) They define the soft benefits for everyone consistently
Most CFOs I've met struggle with soft benefits. Some dismiss them completely and others let each project team determine the real value of soft benefits. This makes it very difficult to compare unrelated projects that each try to improve the same soft metric like customer churn or on-time delivery.
The best practice I've seen is that the business defines the soft metrics in hard value terms. For example, every 1% reduction in customer churn is worth this much. And every 1 % of higher on-time delivery is worth that much. Take the guesswork out and normalize the metrics for everyone.
Given they are soft metrics the hard dollar values will be just estimates. The key point is to estimate once for everyone and not let each project guess for themselves. This makes projects easier to compare and more importantly this gives guidance on which soft benefits are more or less important for the company in dollar terms.
3) They set a minimum hurdle rate of hard benefits that all projects have to deliver. Each company may have a different approach to hurdle rates, but it is typically calculated to exceed the business' cost of capital. Having a clear hurdle rate in hard value can help ensure that all approved projects create incremental value. Requiring the hurdle rate to come from hard benefits also means that soft benefits are counted above and beyond the cost of capital. Companies could still rank their projects by value knowing that this way all projects will create and not destroy enterprise value.
4) They prioritize midsize digital projects that are not too big and not too small. This helps them avoid both multiyear big-bang transformations and also tiny science experiments. In a value/speed prioritization matrix, the big bang project with high value and low speed gets eliminated. The same way science experiments with high speed but little value also get ignored. The projects that are funded will be high-value and high-speed programs which tend to be midsized.
5) They have great internal transparency on value creation. Everyone in the company knows what success looks like and how it is measured. There are 3 things clear about all projects - what is the value they plan to deliver, what are the realized benefits and what is the risk to value. Some businesses even maintain a scorecard on their departments about the % of projects delivered on time and on value. Some - typically six sigma shops - even track the total value created from each program.
+1) They stop projects that no longer meet the success criteria or that are not delivering the value. Sometimes stopping projects are harder than starting them. Either get those projects back on track or stop wasting resources. Leading companies maintain a pipeline of promising initiatives and stopping one project would allow a more promising project to start. This also respects the project team members - letting them working on something that moves the needle.
Priorities matter for both maximizing value and minimizing cost. A simple set of priorities help the teams stay focused and experience repeated success. And that's the virtuous cycle all digital transformations really want to create.