Digital Portfolio Review
Roland Berger provides a Digital Portfolio Review to analyze companies’ digital investments (e.g. internal initiatives, product developments, participations/investments, company building/venturing, partnerships), to evaluate their profitability and to identify the potential achievable through portfolio optimization.
The Digital Portfolio Review identifies specific solutions for minimizing losses in a fast and sustainable manner, achieving improvements and significantly increasing portfolio returns.
Collapsing revenues, production disruptions, liquidity bottlenecks: the coronavirus pandemic has triggered an unforeseeable crisis for numerous companies. The serious negative repercussions for the global economy are severely impacting many organizations. It is precisely in this situation that the opportunities provided by digitalization become apparent.
For years, the digitalization engine has been sputtering in business, politics, and science, despite investments being made in all fields of activity. The potential of digitalization is not fully exploited. Retail stores, for example, could have long since been able to operate innovative payment systems without the need for cashiers. And although a unified, electronic patient file has been under discussion since the 1990s, its introduction by public health insurers has been delayed ever since.
At the same time, the coronavirus crisis is forcing companies to introduce new work methods, change production chains, and create (new) digital touchpoints for end-customers at unprecedented speed to be able to continue to operate and generate revenues.
Preparation themes for extreme situations now have top priority, such as
- Creating digital resilience through, e.g. new work, zero-touch digital and re-shaped touchpoints
- Building digital immunity, e.g. through on-demand structures and digital redundancies
- Exercising new leadership models
- Planning dynamic scenarios & strategy
To prioritize existing themes and these new issues and to allocate digital budgets accordingly, companies must fully digitalize their processes and customer interfaces.
The crisis is the perfect time to tackle the digital transformation and ensure its successful outcome. The current momentum must be seized as an opportunity to critically review the digital portfolio and realign it to the changed requirements. This is the only way for companies to ensure that they can achieve short-term goals, such as maintaining a stable liquidity position, while at the same time enhancing their medium and long-term competitiveness.
In Germany alone, companies spent around EUR 76 billion on digital transformation in 2018. Estimates suggest that around 70% of these investments fail to meet their targets.
The coronavirus crisis has forced many companies to take immediate measures to maintain a healthy liquidity position. As a result, many projects have been stopped or paused. Initiatives for digitalization, in particular, are being reviewed in this context. By mid-April 2020, around 30% of all digital projects had been canceled and projects amounting to almost 50% of digital portfolio budgets had been paused, delayed, or stopped.
At the same time, there are high expectations of progress in digitalization driven by coronavirus. In a representative survey of CEOs, CDOs, CTOs, and CIOs, 2 out of 3 stated that they expected digital transformation to accelerate as a result of the crisis. The focus should be on securing sufficient liquidity in the short term and increasing profitability in the long run.
To achieve their goals of securing sufficient liquidity and creating long-term competitive advantages through digitalization, companies must set the right priorities and accelerate adequate projects during the crisis. This requires a thorough and critical review of the existing project portfolio.
Previous approaches to digitalization have relied heavily on attention-grabbing lighthouse projects, often remote from the core business. This type of project is often associated with high risks and is particularly unsuitable in times of crisis for cost and liquidity reasons.
The analysis of the digital portfolios of globally operating companies brought sobering results to light: few projects reached the expected target margins – despite a supposed excellent USP and market attractiveness. Instead, the portfolio was primarily made up of loss-makers.
This was often the result of a lack of proximity to the core business. Digitalization initiatives in the core business facilitate sustainable transformation and ensure long-term success stories in a competitive environment. The efficient use of existing core competencies simultaneously allows the highest possible potential to be realized and seamlessly builds on a company’s past success. Companies in the post-Corona world should, therefore, clearly focus on long-overdue investments in their core business.
The realignment of the digital project portfolio is crucial for success in the current crisis. Companies must now carefully review their project portfolio and re-evaluate initiatives. Our Digital Portfolio Review can help streamline and optimize the portfolio. The result is a portfolio of digital measures with maximum impact on the core business.
"There ain't no such thing as a free lunch", also applies to portfolio analysis using machine learning. The classic portfolio optimization theory (Markowitz) and approaches to portfolio management remain. However, with the help of machine learning, these can be automated and be carried out more quickly and with far more data.
This does not yet represent a revolution but increases the confidence of these analyses enormously:
Much more information relevant to decision making can now be combined. This increases the amount and quality of data and thus reduces the risk through good preparation.
Automated real-time analyses are now possible and can be implemented in management cockpits and decision tools. This enables faster tests and portfolio optimizations.
Higher analysis accuracy through automated variable selection and faster and broader backtesting allow better use of historical data.
External variables can be used for portfolio optimization. (e.g. key business figures, company news, market figures)
By means of reinforcement learning, algorithms are applied which independently learn strategies for portfolio optimization. New data points are created and simulated.
In a Nutshell: Machine Learning contributes to a more valid composition of the portfolio.
For its introduction, the companies need
- Experts with the necessary financial market econometrics knowledge (similar to the current analogous portfolio analysis)
- Data scientists who have mastered both portfolio management theories and machine learning methods
- In addition to historical financial data, access to data that influence investment decisions. These are used for training, validation and testing of machine learning algorithms
Roland Berger’s approach focuses on individual concepts for optimizing digital product portfolios and aligning them close to the core business. This allows companies to accelerate their digital transformation during the crisis without jeopardizing their liquidity goals.
In this context, our extensive project experience reveals similar patterns in the previous, often unsegmented portfolios of many companies:
- The existence of numerous scattered initiatives with no apparent relevance to the core business
- Isolated implementation of these initiatives
- Few interfaces to the actual internal customers within the organization
- Lack of central management structures and well-defined KPIs
Sophisticated segmentation of the portfolio based on rigorous analysis, prioritization and appropriate restructuring creates transparency and a shared understanding of the grouped initiatives. As part of the ongoing active portfolio review, either the type of investments or the derived KPIs need to be continuously adjusted.
Using the our approach, the ROI of the digital portfolio can be significantly improved, and the probability of success of the remaining digital projects boosted accordingly.
The methods and tools applied can be categorized in line with the Roland Berger solution approach
Roland Berger draws on a wide range of instruments and in-depth experience in realizing efficiency gains in digital portfolios:
- Benchmarking of digital business models and digital capability of the organizations
- Portfolio optimization to maximize the expected return while minimizing costs and financial risk
- Restructuring & innovation based on a feasible implementation plan to drive organizational change - including a selection of the most effective innovation vehicles
- Corporate leverage to ensure a targeted transformation of the company towards the defined target image, with well-defined KPIs for performance measurement
Using the Digital Portfolio Review approach, the ROI of the digital portfolio can be significantly improved, and the probability of success of the remaining digital projects boosted accordingly.
All relevant strategic dimensions of the digital portfolio have to be considered, and the following key questions need to be asked:
- Why (with what objective) are digital investments made (strategic vs. financial considerations)?
- Where are investments currently being made? Are these investments targeted and essential?
- What digital investments are needed to fulfill the company's vision?
- How should the digital portfolio look for different scenarios (best-case, worst-case)?
Our Roland Berger Digital Benchmark Database also allows us to derive meaningful recommendations based on a large number of existing data sets from numerous digital companies. Our comprehensive know-how in the field of digitalization means that we are familiar with all dimensions and strategic cornerstones of successful high-performance portfolios – from local start-ups to established multinational corporations.
An automotive OEM was faced with the question of how past successes in vehicle sales could be replicated in the future, in which the importance of mobility services will have grown, and purchasing/financing practices (keyword ‘car as a service’) will have changed. Digital transformation was the proclaimed mantra, and now the digital initiatives have to be reviewed. To ensure long-term success for our customers in their digital transformation, we analyzed and optimized the entire digital project portfolio.
The focus was on three objectives:
- Reducing the cash outflow from loss-making digital initiatives without abandoning the essential future mobility themes.
- Prioritizing those digital products that are perceived as independent offerings on the market and that have a high probability of success in achieving a leading market position
- Making clear distinctions depending on the digital initiative, whether these are implemented in the (internal) make vs. (external) build vs. partner approach.
Minimization of start-up losses by stopping and rightsizing unattractive initiatives result in a direct positive EBIT effect
Strengthening the core business through portfolio focus
Resolution of cannibalization conflict between existing and new business
In this management summary, we outline the main strategies to maintain a successful digital investment portfolio. We offer advice on how to exploit the potential digital opportunities while securing liquidity. Fill out the form below and receive your PDF copy via email.