Spending on digital transformation is forecasted to hit $4 trillion by 2027 (IDC)

Digital transformation is happening in every industry. Companies are integrating digital technologies to streamline operations and improve the customer experience. However, for business leaders considering this shift, one of the biggest questions is: ‘What is the average cost of digital transformation?’

So, this blog will help you understand the cost of digital transformation, its contributing factors, and how to plan its flawless implementation..

What is Digital Transformation?

Digital transformation is the process of adapting digital tools and technologies to transform and digitize business processes. 

Digital transformation can also involve automating business processes integrating advanced analytics or deploying cloud services for business processes. This ensures enhanced services for end users by leveraging modern technologies. Moreover, it also includes migrating from traditional to cloud-based systems.

Average Cost of Digital Transformation

According to McKinsey 89% of large companies globally have a digital and AI transformation journey underway.

The cost of digital transformation is diverse and can vary for each business. For small and medium businesses, moderate projects might cost between $50,000 and $500,000. While some big companies may even reserve up to 3% to 5% of their annual revenue for digital transformation efforts!

The cost of digital transformation is flexible for every business. Here’s why:

• Different business goals: The scope of the transformation project varies depending on individual goals. Corporate goals can be as simple as getting a newer software tool or could be all-inclusive, requiring a complete business transformation.
• Size and scale: Larger companies have more employees, greater volumes of data, and need more investment in IT infrastructure. This leads to increased complexity and adds to the cost of digital transformation.
• Type of technology: Some technologies, like AI or ML, are costlier than the general standard cloud solutions or digital marketing tools.

Let’s expand this further by looking at the major factors influencing the cost.

Major Factors Affecting the Cost of Digital Transformation

Gartner Forecasts Worldwide IT Spending to Grow 7.5% in 2024

Digital transformation is a great facilitator for innovation and growth for any business. However, it can sometimes be costly. The key points below explain the factors affecting the end-to-end cost of digital transformation and will simplify the entire process for you. Read below to find out:

Company Size

The cost of digital transformation depends on the size of the company. For a smaller company with 50 employees, the cost will be less as there are fewer processes to automate. The complexity of digital transformation increases with the increase in company size. A big organization with 5,000 employees will require complex solutions and more investment.

Additionally, big companies require extensive data migration strategies, improvements in IT infrastructure, and integrations with existing systems. This adds to the cost.

Moreover, each department in these big companies requires digital solutions. These customized solutions require more expenses not only for their development but also for maintenance.

Customization Requirements

There are several reasons why open-source solutions are popular today. They are widely available and much cheaper compared to custom software. However, they may not cater to your core business needs.

However, custom-built solutions cater specifically to a company’s unique operations, thereby making them agile, efficient, and scalable in the long run.

This personalization boosts productivity, reduces errors, and simplifies processes to increase the project’s return on investment. Also, custom solutions are usually quite compatible with other tools and systems that the business is already using. This reduces the number of disruptions and gives you a competitive edge.

However, the development and deployment of custom software add to the cost of digital transformation. It requires business knowledge, collaboration between stakeholders, and a testing process that needs more time and investment.

Internal Resources vs. Third-Party Help

Leveraging internal resources is less expensive for digital transformation if a company has an effective IT team. However, all changes usually require expertise in technologies like AI, blockchain, or machine learning. The implementation of this advanced technology requires technology partners such as an IT consulting company, as they possess related experience and knowledge.

A strategic approach to balancing the cost of digital transformation is using in-house resources to do the simpler work while engaging external resources for complex work. This hybrid approach provides flexibility and control over cost but must be planned carefully so the internal and external teams may collaborate.

Usually, it is better to begin with the internal team. Working with third-party resources often results in faster implementation but is more expensive. However, they add more expertise to your team, ensuring quality end-to-end solutions.

Training and Change Management

Training can either be through workshops, online courses, or hands-on sessions, and the cost can range between $1,000 to $5,000 per person. Change management is critical in digital transformations at a bigger level because it guides employees during this change, addresses concerns, and builds a culture receptive to technological shifts.

Effective change management is critical; otherwise, even the most advanced AI business solutions may fail if employees resist using them. It involves structured communication, feedback loops, and continuous support to ensure the transition is smooth and that employees are supported through this process. Investing in full-scale training and change management saves time and also protects them from bottlenecks later on.

Ongoing Maintenance and Upgrades

Digital transformation is not a one-time expense; it requires constant investment to keep systems up-to-date and fully functional. Software licenses may need to be renewed and sometimes upgraded for compatibility and security purposes.

Custom solutions also need scalability as business needs change, and may also require AI integration with other products or services.

Maintenance costs are estimated to be between 15-20% of the original cost. This also covers expenses related to software updates, security patches, and support services. For instance, it would require around $75,000 to $100,000 for annual maintenance on a $500,000 project.

Overlooking maintenance creates performance issues along with security vulnerabilities. This can reduce the ROI earned on investment in digital transformation.

Examples of Digital Transformation Costs by Industry

The forecasts by IDC indicate that the digital transformation market will achieve a five-year CAGR of 16.2% from 2022 to 2027.

Every industry has challenges that vary in terms of cost. The cost of digital transformation differs widely among businesses. This section describes how the cost of digital transformation can vary for each industry.

• Retail: Retail companies focus primarily on customer experience and usually spend $100,000 to $1 million on digital transformation. Examples include personalized marketing and mobile payment solutions.
• Manufacturing: For manufacturing companies, it usually involves IoT sensors, automation, and predictive maintenance. For such a change, the costs can range between $500,000 and $5 million, based on scope.
• Healthcare: For healthcare provider companies, it involves electronic health records, telemedicine, and patient data security. The costs start at around $250,000 and extend well into more than $2 million.

Tips to Reduce the Cost of Digital Transformation

Most digital businesses worry about the hefty cost of digital transformation when they automate their processes. However, this is achievable by setting a budget and planning an efficient execution. This section offers actionable advice that enables you to save money and become and improve business growth!

• Pilot Programs: Try pilot programs to test and measure impact before full-scale transformation. For example, don’t try to transform all customer service processes in one go. Start with an AI-driven chatbot for simple inquiries first. Expand to others if that works well.
• Scale appropriately with available capabilities: Cloud computing and subscription-based models allow companies to pay only for what they need today and scale up later.
• Leverage internal resources: Utilize the maximum skills available within your team. If your IT staff is already conversant with cloud services, leverage their expertise. This could lead to straightforward implementations without looking outward for everything.
• Package Projects: Many technologies offer discounts if you avail of more than one service. For example, most cloud providers offer great discounts if you use their site for storing data, analytics, and machine learning.
• Highlight Training: The right investment in proper training can limit the likelihood of error and increase future productivity. Good practice of change management can avoid re-implementation costs or, worse, user resistance later on.
• Negotiate Contracts: Digital transformation projects involve long-term contracts with providers. So, negotiate terms, ask for trials, or get package deals. They are often flexible, especially for long-term partnerships.

Conclusion

Digital transformation can sometimes be costly, but it does not have to be intimidating. Knowing what factors impact the costs and in which way to set up the budgets can help you handle the costs of digital transformation wisely.

So, follow a clear plan, and ensure that every need is addressed in planned phases. Moreover, as technology continues to evolve and develop the cost of digital transformation may only drop lower.

Businesses of all sizes can access modern cloud services and automation solutions. A successful digital transformation can ultimately prepare a business for better productivity, growth, and sustainability in the digital-first world.