Digital Darwinism: Using Intangible Assets to measure digital transformation

If your company has been spending inordinate amounts of money and time desperately upgrading its technology suite, don’t worry, you’re not alone.

While Covid-19 stalked the earth, the normally calm marathon of “digital transformation” projects quickly turned into a sprint as companies tried to survive the rapidly changing market conditions. The global pandemic disruption forced many operations to go online and businesses learned the hard way that their heel-dragging over recent years had put them at risk.

As the grandfather of biology Charles Darwin wrote in 1859, “it is not the strongest of the species that survives, nor the most intelligent. It is the one most adaptable to change.” During Covid, companies that hadn’t yet digitally transformed their operations suddenly found themselves being naturally selected out of the corporate gene pool when everything fell apart in 2020.

But while embracing the digital is a key adaption for any company hoping to thrive in the new business world, the success of a digital transformation can be frustratingly hard to measure.

What is digital transformation?

Digital transformation is an umbrella term for the process by which companies deploy all kinds of digital technologies to improve their efficiency, innovation and, ultimately, value. According to the MIT Sloan School of Management, digital transformation has four pillars:

• Customer Experience: Meet the evolving expectations of digital-first customers;
• Employee Experience: Help employees work smarter, not harder;
• Optimising operations: Generate greater value by streamlining operations;
• Transforming business models: Uncover or develop new revenue streams.

The traditional way of measuring the success of a digital transformation project is for senior management to apply key performance indicators (KPIs) and look at sales and profitability.

However, these waypoints are mostly lagging indicators that tend only to measure what happened in the past. In other words, the results – good or bad – of a digital initiative will only show up in a company’s financial metrics long after any tweaks or pivots need to be made. As decision-makers wait for these results, the company will be burning cash and potentially suffering from opportunity costs.

Measuring digital transformation deserves a more refined approach because senior managers must be able to anticipate the future, rather than be forced to look in the rear-view mirror. That’s why using an Intangible Assets framework can be an excellent alternative.

Intangible transformation

Intangible Assets are both valuable and everywhere. However, they tend to be left off the balance sheet, aren’t captured by profit and loss accounts and don’t appear on the risk register.

However, using Intangible Assets as a framework is a great way to measure the success of a digital transformation so leaders have the information they need to make better decisions.

Intangible Assets broadly fit into 12 separate classes and a digital transformation project will have different impacts on each class. These 12 classes include relationships, confidential information, industry expertise, design, approvals and certifications, plant varieties, content, invention, brand, software, network effect and data.

The exact details of a company, and the sector in which it operates, will be important. But a standard digital transformation project will likely have the greatest impact on the asset classes of data, software, innovation, industry expertise and relationships.

Let’s do a deeper dive into these relevant classes and see how they can help measure the success of a digital transformation project:

• Data: Capturing reliable data is the first leading indicator of digital transformation success. Good quality data, combined with strong analytics, can do more to improve a company’s operational efficiency than almost anything else. Businesses can quickly amass huge data pools, but not all data is relevant. Reliable data depends on carefully designing a collection methodology that sticks to a clear business strategy;
• Software: Data without analysis is like money sitting idle in the bank: worthless. Building strong analytical capabilities can generate incredible, real-time insights into how a digital initiative might be ticking along. Artificial intelligence (AI) and machine learning can both rapidly analyse data to create a feedback loop that guides business strategy and searches for more valuable data to accelerate digital transformation;
• Innovation: With good data and analytics, organisations can spot hidden gaps that might be great sources of innovation. Examples of data-generated innovation include adopting new automation to improve supply chains or using AI to personalise customer experiences. The number of operational gaps being filled and the amount of innovation emerging are both leading indicators that a digital transformation is having positive results;
• Industry Expertise: Raising the capacity and output of talented people is the fourth leading indicator for the success of a digital initiative. People always rely on tools to augment their labour, so the better the tools, the more productive a person should be. For example, automation can drastically reduce the time staff must spend on repetitive administration. The primary goal for most companies enacting a digital transformation is to free up staff time for them to tackle higher-value tasks;
• Relationships: Lastly, the fifth leading indicator is if the digital initiative is creating a clear and tangible improvement to an organisation’s relationship with its customers at various touchpoints. By deploying a greater set of digital tools, enterprises can analyse sales performance or marketing with the aim to adjust campaigns quickly and effectively. This is especially important in digital sales where the winner often takes all.

These aren’t the only Intangible Asset classes impacted by a company’s digital transformation. Others such as network effect, content and confidential information will also come into play. But the point of using Intangible Assets as a framework is to narrow down which classes will offer the best lens to judge the true results of a digital initiative.

Gotta start somewhere

With such deep disruption facing modern companies after Covid-19, managers at all levels should be thinking about how to use the Intangible Assets framework to find leading indicators of digital transformation success. If they continue to measure lagging indicators like KPIs, their firms may not have the juice to adapt fast enough to evolving market conditions.

And the last thing any company wants is to be the last dodo bird on the island.