The portfolio approach to digital transformation: 4 keys to success

Corporate projects are classically evaluated on standard matrices such as return on investment (ROI), break-even period, and capital invested. But as organizations look to quickly leverage the power of emerging digital technologies for business growth, such an approach is falling short on expectations.

“Digital initiatives are innovative and although it’s fair to have an anticipation of ROI, having an iron-clad approach to specific monetary returns from each IT project won’t let some of the big bold ideas to go through,” says Sushant Rabra, partner at KPMG.

Moreover, enterprises are more inclined these days to focus on shorter horizons rather than big-bang initiatives that take years to provide returns, says Sunil Mehta, CIO at business and management consultancy BDO India.

“Companies today don’t want to have three- or five-year plans. There has been a shift from long-term planning to short-term planning of 90, 180 or 360 days. They don’t want to wait for the outcome of one project and then subsequently add on to it. Instead, companies now want to take up projects in parallel rather than sequentially,” Mehta says.

This is where the portfolio approach comes in wherein different projects are managed similarly to how a portfolio of stocks is managed.

“The portfolio approach to digital transformation is akin to an individual investing different amounts in different stocks to build a portfolio and then expecting different returns from each one of them over a period,” says KPMG’s Rabra. Extending the analogy to IT leaders, he says, “In such an approach, a CIO will spread investment capital across different digital initiatives, expecting different value from each. There could be one or two projects giving 5X returns while others could be in the range of 2x and 1X. However, all of them would still return value to the company and the stakeholders.”

To capitalize on the gains offered by digital technologies, CIOs are building technology portfolios by allocating diverse investments based on prospective risk, reward, and value.

“Such a risk-based capital approach is important as it provides a new experimental push to the organization that may propel it into a new orbit,” says Rabra.

For the portfolio approach to bring dividends to the company, IT leaders must adhere to the following best practices.

Align with business goals

The IT department’s portfolio of projects must be in sync with the company’s business direction, vision, and goals. For instance, if a company is eyeing fast growth, an important business consideration would be to acquire new customers and increase efficiency and productivity. Consequently, the CIO should build the portfolio of digital transformation initiatives around these areas.

R Anand Laxshmivarahan, group chief digital and information officer at Indian conglomerate Jubilant Bhartia Group, explains this through an example. “A manufacturing organization can be broken down into three big blocks — manufacturing, supply chain, and sales and marketing — wherein the company strives to bring in efficiencies. As the first step, therefore, IT leaders must assess the value they can unlock within these three blocks to impact the top or bottom lines. They could look at leveraging digital technologies to impact crucial business functions such as driving raw material cost down or throughput up to produce more in less time; improve energy efficiencies and reduce logistics costs,” he says.

CIOs can build a portfolio of projects in these areas to deliver a pre-defined value on an annualized basis.

“Failure is common, and all the projects may not deliver the expected ROI. This is exactly what a portfolio approach is all about. Some of the projects within the portfolio may overdeliver while others may underdeliver. In our case, if I look at the last five years, the portfolio of solutions in various areas have reached a level of satisfactory maturity. Besides, it has also helped us shed our overdependence on consultants in many areas,” says Laxshmivarahan.

Balance investment and risk

Many IT leaders in enterprises across verticals are implementing new technologies at a frantic pace. In their zeal to quickly build a portfolio of digital transformation projects by leveraging disruptive technologies, CIOs tend to ignore the risks associated with the IT investments. As a result, many IT leaders can develop agendas that lack balance between the company’s appetite for risk and the CIO’s need to build a project portfolio with agility.

IT leaders must, therefore, work closely with the CFO so that they are on the same page and the entire portfolio is in accordance with the company’s budgetary strategy.

“The CIO should keep a close eye on the financial performance of the portfolio,” says BDO India’s Mehta. “IT leaders should not go overboard on the budget. If X amount of money is required for a certain project, it’s not uncommon to see costs escalating by 2X or 3X. This is where the danger lies. IT leaders adopt a portfolio approach to gain strategic competitive advantage but if they are not personally involved in the projects, costs can spiral. They must stay on top and those involved in the projects should be kept on a tight leash. While they should give freedom with respect to ideas, experimentation, and processes, costs and timelines should be kept sacrosanct. A CIO must take a cautious calculative risk approach.”

Structured entry and exit

Individual investors keep a close watch on their stock portfolios. To maximize value, investors regularly revisit the makeup of their portfolios, introducing or exiting investments, thereby ensuring regular churn in their portfolios. IT leaders must adopt a similar approach in the context of digital transformation.

“For their digital projects’ portfolio, IT leaders must have a time horizon,” Rabra says. “There are times when private equity firms are invested in enterprises. They have a typical time frame of staying invested for four to six years before exiting. So, CIOs can’t stay invested in indefinite projects.”

Rabra says, “There must be a churn based on a structured entry and exit criteria. Technology is changing fast. If it’s gen AI today, it could be something else tomorrow. When IT leaders decide to build a portfolio, they shouldn’t start adding technology projects randomly. They must enter keeping the technology-business alignment in mind. Similarly, they must be ready to exit if the PoC [proof of concept] doesn’t meet the expected time and effort or if a project is not moving in the desired direction.”

“Technology decision-makers must evaluate the project at a predefined timeline — 6 or 12 months. Adopting a portfolio approach doesn’t mean one has to stay invested at the cost of the health of the portfolio,” he adds.

Manage stakeholder expectation

The advantage of adopting a portfolio approach to digital transformation is that CIOs can place several technology bets at the same time.

“IT leaders may initiative five different things simultaneously, but when there are so many projects running in parallel, they can’t execute everything on the same day. They must define clearly to the leadership team that they would take time in going live,” Laxshmivarahan says.

“The portfolio of programs would need to be managed through stage gates. So, CIOs must prioritize the projects based on their value, which could typically be 18/24/30-month period and communicate it clearly to all the stakeholders. Expectation management is crucial for the success of the portfolio approach,” he adds.

Technology leaders could also do well to include a buffer of a couple of weeks when communicating the timelines to the top management. Although meeting the deadline is always commendable, in case there is a delay, the buffer will help ward off the pressure and stress from the IT team.