A budget helps a company not only control its spending, but also acts as a model for it to prioritize and allocate its financial resources. It creates a financial roadmap for a company and facilitates successful pursuits of its goals. Typically, a budget is prepared based on strategic priorities, estimated costs, timelines, desired outcomes, quantifiable benefits (the return on investment), and a variety of other factors. However, in the case of making the budget provisions for a Digital Transformation, it is difficult to follow this process.
There is no doubt that Digital Transformation is important for manufacturing companies. However, its budgeting and implementation processes present challenges. Implementing Digital Transformation is challenging because it not only includes conceiving the deployment of enabling technologies, such as Industrial Internet of Things (IIoT), Artificial Intelligence (AI), and digital twins to achieve business objectives, but also converts conceived possibilities into tangible business outcomes.
With Digital Transformation, the business objectives of a manufacturing company are not tied to a single function; oftentimes they span many functions, including production, operations, quality improvement, maintenance, IT—all the way to marketing, sales, HR, etc. Budgeting for Digital Transformation is difficult because of the many unknowns associated with assessing the resources, infrastructure, and time required, optimally leveraging enabling technologies to achieve each of the business objectives, and the certainty of success.
Digital Transformation is still relatively new to the industry, which means there are numerous associated factors and challenges that are difficult to foresee upfront. The companies undertaking Digital Transformation projects must start with the clear understanding that, by its very nature, every Digital Transformation project is different from every other project and the return on investment will be realized over a period of time and, at its best, is only an evaluated expectation.
Budget Must Be Flexible to Address Digital Transformation Challenges
Given these challenges, it will be appropriate for a company attempting Digital Transformation to adopt an approach while budgeting that addresses the issues involved and develop a budget that is aligned with Digital Transformation strategies.
A good Digital Transformation strategy involves preparing a master list of goals to be pursued, prioritizing them, and starting the project with a small set of clear, quickly achievable, and easy quantifiable and measurable business objectives. Let the master list include the uncertainties relating to resources, the selection of the appropriate technologies, goal-achievability, learnings from prior implementation experiences, and any course corrections made to attain prior objectives.
Budgeting may also adopt a similar step-by-step flexible approach with a built-in mechanism to undertake periodic reviews. In effect, make provisions for each of the goals separately in the overall budget.
The Minimum Viable Product (MVP) technique has been quite popular while preparing the budget for large scale Digital Transformation initiatives. This technique prescribes a new product to be developed in phases and funded accordingly by focusing on a minimum set of capabilities and features to be achieved. The idea behind this technique is to potentially obtain feedback as the development work progresses from one phase to the next, validate assumptions, learn from experiences, and take course corrections as needed to perfect the processes.
The MVP technique, like the Agile approach, involves starting a product development—in this instance, pursing a Digital Transformation objective—with a vision about what it is, broken down into phases, funding the first phase of the project, and managing it effectively to achieve the first stage objective. In this technique, instead of having a detailed roadmap up front, a project is broken down into a series of phases or milestones.
A detailed plan and budget is developed only for undertaking the involved phase, and after its completion the project moves to the next stage with its own timeline, budget, and objectives. By this, the team gets budget commitment to each phase before moving on to the next one. After achieving one goal, the next goal is funded. This technique helps in controlling the risks by funding the project phase-by-phase.
Ensuring Digital Transformation Success Demands Collaboration
Many of the objectives set to be achieved through Digital Transformation are related to the specific value added/functional activities of the company such as procurement, production, design and engineering, maintenance, and others. It may be a practical proposition to link specific Digital Transformation objectives to many related functional divisions.
For example, an asset intensive company may be envisaging the goal of increasing production by improving the plant equipment availability/reducing equipment downtimes as one of their Digital Transformation objectives. While the maintenance department will know that this objective is best achieved by adopting predictive maintenance practices instead of the breakdown maintenance practices that may be currently in vogue in the company, the production department will be able to assess the impact of such a change on production. More importantly, theses departments are also well equipped to help prepare the business case. Therefore, by making the maintenance and production departments collaborate with the budget development process that is linked to the initiative of improving production by adopting predictive maintenance strategy, the chances of achieving the objective are improved.
Yet another company may want to improve the quality of the products that it manufactures so that it can, for example, reduce after-sales support expenses and improve the company’s brand image. The departments dealing with quality assurance, production, and after-sales support are best placed to prepare the business case and help achieve the objective. Therefore, making these departments the stakeholders to the project will improve the probability of succeeding.
Supporting the Digital Transformation project initiative with a budget that is flexible and lends itself to be suitably modified (if the need arises) during the implementation process to meet the project objectives and ensuring collaboration among various departments or functional groups will be essential for the project to be successful.