The “what” of financing determines the “how” of financing
There are four digital investment types: Pure business initiatives, foundational investments, trial investments, and big bets. An orchestrated Industry 4.0 transformation effort is typically a mix of all four types.
The challenge is to prove that a digital investment, without proven returns, is competitive compared to conventional investments that have demonstrated ROI; internally (company) and externally (investor).
Digital Investment Types
The “what” of financing determines the “how” of financing. A pure business initiative, for instance, which is directly attached to increasing revenue, can demonstrate ROI fast. Consequently, supporting the business case is easy and securing financing is no challenge. A trial investment, on the other hand, is explorational in nature, and without a clear ROI attached to it. This makes project backing considerably harder.
A trial investment’s success may lead to a foundational investment — an enterprise-wide effort to upgrade infrastructure, upskill the workforce, push for cultural change and more. And then, of course, there are the big bet investments, which usually exist outside the usual financing process. A big bet is a significant strategic investment like a major acquisition, which aims to produce across multiple business lines.
A digital transformation will likely involve all four aforementioned types, as the effort continues. For instance, the need for an enterprise-wide foundational investment may create a need for the big bet acquisition of a provider. Executives should keep these broad digital investment types in mind, as their risk-level differs.
Securing Internal Industry 4.0 Project Financing
To secure internal funding, executives need to find the right strategy, talent, and operations; This process has six essential elements:
- Foundations: How much to spend and who will provide the budget?
- Risk assessment: How much risk is involved in the investment?
- Resources allocation: What is the optimal resource distribution across initiatives?
- Success definition: What goals or metrics will be measured to monitor success?
- People definition: Who are the best people to evaluate these goals or metrics?
- Built-in safety: How to stop funding and when to stop it?
The process outlined above is a simplification of a very delicate and complex matter. Naturally, all of these questions should be carefully adjusted to each company’s context, and balance the role of the center with the role of the individual factory. For instance, a more direct and forward-thinking center is much more likely to fund experimental investments, to secure a faster progression. In either case, the principle being the closest-to-action individual is the project owner, each individual factory should retain ownership and execution responsibility for the effort.
Securing External Industry 4.0 Project Financing
Securing funding from external groups is harder. An outside investor may doubt that a more traditional company could find digital success, and may instead opt to invest or buy stock in an established digital-ready actor.
Executives may adopt one of the two following communication approaches: They may opt to keep their digital strategy hidden, avoiding to talk broadly about their digital investments until they’ve demonstrated enough value to discuss externally. Or, they may prefer an over-communication strategy in the first place: Bringing their digital ambitions to the front of all external discussions.
No matter what approach is adopted, one thing remains certain: The company must stay ahead of investor questions at all costs. Industry disruption, actions by competitors, major investments should all be factored in to craft a compelling story to demonstrate the company’s unique advantage against other investment opportunities.
At SmarterChains, we help manufacturing plants navigate through their Industry 4.0 journey.
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- SmarterChains blog:
Why Only 1% of Digital Transformation Efforts Exceed Expectations
- SmarterChains blog:
The Manager’s Guide to Industry 4.0 Projects: Path to Scale
Digital transformation: online guide to digital business transformation