In today’s dynamic digital landscape, the stakes for successful digital transformation have never been higher. The promise of increased efficiency, agility, and competitiveness has propelled businesses into substantial “digitalization” investments in technology, data, and analytics. Each of these investments is typically analyzed and justified based on its ROI in either efficiencies, compliance, or additional revenue.
However, there is another layer of benefits that accrues to organizations which set out down the digital transformation road: they give an initial push to a digital flywheel, which as it spins and accelerates, gives momentum to future digital investments by reducing the investment needed to create new capabilities.
The Mechanics of the Digital Flywheel
In the world of mechanics, a flywheel is a heavy rotating disc that once set in motion, conserves the kinetic energy and maintains a consistent velocity. The more energy you input early on, the less you’ll need to maintain or increase its speed later. Similarly, initial digital investments, when executed wisely, can set in motion a series of benefits that compound and accelerate returns on subsequent investments.
For instance, investing in a robust cloud infrastructure can offer immediate returns in terms of scalability and reduced overhead costs. But its ripple effect extends beyond just that. Once established, this infrastructure can be leveraged for a plethora of subsequent projects, from data analytics to AI-driven solutions, without the need for major foundational expenditures. The groundwork has already been laid, and the benefits multiply.
Initial digital investments can dramatically reduce the investment needed for follow-on digital enhancements, in effect moving the organization into a “new world” of innovation. Nothing can make the impossible possible. But by significantly reducing the costs & complexities of building future capabilities, early digital investments can make the unfeasible feasible. Huge reductions in “I” drive huge growth in ROI.
Reducing Friction, Increasing Pace
One of the most tangible advantages of the flywheel effect in digital investments is the reduction of friction for future projects. Initial IT projects often involve tackling systemic inefficiencies, outdated systems, and resistance to change. By addressing these early on, businesses create an environment that’s more conducive to digital innovation. The early track record of previous projects serves to calm and silence the skeptics, and embolden the visionaries in an organization.
Furthermore, the knowledge and expertise accumulated during the course of the first few projects often lead to a more skilled and adaptive workforce. This internal expertise, combined with established platforms and tools, translates to reduced reliance on external consultants, faster project lifecycles, and quicker time-to-market for digital solutions.
The Most Extreme Cases: from 0 to Taking Over the World
The flywheel effect becomes more evident when we look at “digital-first” organizations. Companies like Amazon and Google didn’t become tech behemoths solely based on their initial ventures. Their early investments in digital infrastructure and capabilities paved the way for a myriad of other ventures. For instance, Amazon’s initial investment in its IT infrastructure not only supported its e-commerce platform but later served as the foundation for Amazon Web Services (AWS), a leading cloud service provider today. This not only provided Amazon with a new revenue stream but also positioned it as a leader in the cloud computing space.
Similarly, Google’s investments in search algorithms and data centers didn’t just refine its search capabilities. They set the stage for ventures into cloud computing, AI, and more. Their early work reduced the incremental cost and effort for these subsequent innovations.
This is the digital version of “the rich get richer”, as they continue to harvest their technology capabilities to build new and different capabilities.
Beyond Technology: A Shift in Mindset
The flywheel effect of digital investments isn’t just a technological phenomenon. It represents a shift in mindset. As organizations recognize the compounding benefits of their initial digital endeavors, they become more attuned to opportunities for innovation and more agile in their response to market demands. This proactive and anticipatory approach to business is what sets digitally mature organizations apart. It’s not just about having the latest technology, but about cultivating a culture that seeks, values, and leverages digital opportunities.
The Window to Join the Leading Edge is Closing
In the race to digital transformation, viewing IT projects as isolated endeavors with finite ROI can be a limiting perspective. Instead, envisioning them as the first push to set the digital flywheel in motion can lead to an accelerating momentum that compounds ROI. As the business landscape continues to evolve, organizations that grasp and harness this flywheel effect stand to gain not just in terms of financial returns, but also in agility, resilience, and sustainable growth.
And for this same reason, the opportunity to catch up with the leading edge may be evaporating for companies which don’t move soon in this direction. In the age of digital acceleration, it’s time – or even past time – to think beyond immediate gains and set the wheels in motion for long-term, compounding success.