Tips to Plan a Budget for Digital Transformation

Tips to Plan a Budget for Digital Transformation

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The world around us is constantly changing, and businesses need to embrace this change if they want to thrive and grow. Digitalization is one change that many companies are considering to improve efficiencies and the overall customer experience. In our previous article, we discussed Digitalization and its benefits for businesses.

While digital transformation projects produce cost savings, revenue growth, or productivity enhancements, they don't happen overnight. In many cases, significant time and financial investments are required. For businesses to realize the gains they want to achieve from this transformation, a detailed budget should be prepared which will provide clear evidence of the advantages the business will gain upon completion. To realize these efficiencies and improvements, an appropriate budget for digitalization needs to be created with detailed proof about the benefits that will be realized afterward.

However, the digital transformation process can be very costly for businesses, especially if they aren't adequately prepared. While many organizations prepare a budget for this business transformation initiative, they often miss critical factors impacting the overall cost and scope.

1. What makes budgeting for digital transformation so challenging?

An obvious question to ask is, what makes digital budgeting so complicated?

1.1 External Factors

Many digital transformation initiatives are technology-led, which means more time is dedicated to researching, analyzing, and planning deployment strategies but not enough time to understand other external factors. These external factors could be related to the marketplace itself and how well the transformation initiative will meet new business and customer demands.

A perfect example of this is the COVID-19 global pandemic. Many businesses hadn't considered anything of this nature and had to make significant changes. Other digital transformation factors that are often overlooked include:

  • The impact of other technological disruptions on your industry or sector. For example, artificial intelligence (AI) and machine learning (ML)
  • The need for digital capabilities that may not have been required in the past, such as data analytics, cybersecurity, or customer experience design
  • Changes in workforce demographics (the growth of the gig economy, for example) and their impact on skills needs worldwide.

1.2 Unrealistic Budgets

The amount of money that some companies have initially set aside for digital transformation projects doesn't always account for the work required.  A global study by Cisco of C-level executives found that 13% of SMB organizations had unrealistic budgets for their digital transformation plans.

Understanding the full scope of the project is essential for creating a realistic budget. Without it, you may be underestimating or overestimating the cost and time commitment required for your project. Often companies base their complete budget on initial conversations with a developer or vendor but fail to have a detailed deep dive into exactly what's needed.

Without proper Research & Development (R&D) phase, this estimate is flawed as it won't cover the complete scope of the project. To properly budget for digital transformation, it's important to understand the different phases of the project. The R&D phase is key to understanding the full extent of the work required. This phase involves researching and analyzing the business goals, as well as mapping out the technical requirements. It's also important to involve all stakeholders in this process, as they'll have a better understanding of what is needed for the project. The result of this phase is the Specification Document. 

Without this detailed project discovery process, vendors are only able to provide very rough estimates which are simply unable to account for the full extent of the project. By failing to properly plan for digital transformation, businesses can run into serious issues down the road.

1.3 Scope Creep

A common phrase in project management and development circles is scope creep, which occurs when the budget and scope of a digital transformation project don’t match. This often occurs based on changes in technology and customer expectations requiring additional rework.

One way to prevent this is to work in iterations, where digital transformation projects are divided into short milestones and goals to measure success and establish an achievable timeline. That way, you can re-evaluate the digitalization plan when necessary and make any changes before moving on to the next phase.

2. What to focus on to ensure an effective budget?

There are a few things you need to consider when planning your budget for digital transformation.

2.1 Prepare documentation

Preparing documentation, including a digitalization strategy and digital transformation plan, will help you save money in the long run by helping your team make better decisions about what needs to be done.

One key document that companies should have is a Software Requirements Specification document (SRS document).  This document will help to make sure that the development process is carried out effectively and efficiently, without any costly misunderstandings.
An SRS is a document that describes the program's intended functions and how they'll be expected to operate. It also covers the product's features, including the needs of all stakeholders. The best SRS documents go into detail regarding how the software will work when it's put into hardware and linked with other programs. Good SRS papers also consider actual-world users.

An SRS Document should be written at the beginning of a project and will help to avoid problems that may occur during the development stages.

2.2 Understand How to Write a Software Requirements Specification Document

To make sure that a digital transformation project runs smoothly and successfully, a detailed SRS is instrumental. These documents aren't easy to create, but following this simple process will help.

  • Create an outline first — don't get lost in the details out the gate. Start with a simple outline and then expand upon it as you have details and information.
  • Outline your purpose — what exactly are you trying to accomplish. What are the benefits you are trying to realize and who will realize those benefits? With your solution, who is going to use it and how are they going to use it? Try to provide as much detail in this section as you can.
  • Provide an overview of the end goal — describe what you're trying to achieve. What is the end goal of your project? Is it a brand new product or just an update to an already existing product?
  • Detail the specific requirements — talk about the functional and non-functional requirements of the project here.  What are your constraints? What will the project look like overall and what features must be included in it?
  • Get sign-off on the SRS — it's important to get the SRS approved by all of the key stakeholders when completed.  This way, everyone is aware of the project's requirements and objectives. It'll also help to avoid any confusion or misinterpretation later in the project.

Now that you have a plan in place, it’s important to allocate the necessary budget for digital transformation. Depending on the size of your business, consider spending up to 10% on research and planning during the early stages of your digital transformation plan.

The time spent now on researching and planning as well as budgeting could save money later as it’s often less expensive to do it right from the start instead of making changes down the line.

2.3 Estimates should be flexible

Before any money is spent on digital transformation, it's important to establish a clear goal and strategy. What are you trying to achieve with digital transformation? What problems are you hoping to solve? Without a clear goal in mind, it'll be challenging to determine which steps are necessary and which ones can be skipped.

Having this understanding is essential in identifying the right digital transformation solution for you. There are so many possibilities when it comes to digital transformation, which makes it easy to get carried away with new ideas.

While some of these ideas may bring benefits to your organization, others might not justify their cost or time investment. Team members must have an open dialog about reality versus digitalization pipe dreams to focus on key strategies within realistic parameters rather than being tempted by shortcuts that may not offer the desired outcomes.

This is where having a budget for digital transformation comes in handy. A budget will help you to focus on what’s essential and what can be realistically achieved within the set timeframe and allotted funds. With your digital transformation budget, it's important to consider what you'll do if you hit any roadblocks in implementation. No digital transformation project goes according to plan 100%. As such, it's important to budget for contingencies to account for unforeseen obstacles and changes in direction. By keeping a 10-15% contingency available, you can make the necessary changes to keep your project on track.

2.4 Find the right vendor

Think long-term when planning your digital transformation journey. Many businesses are only concerned with achieving short-term results that they don't consider extending their focus beyond three years. So set specific goals beyond just keeping up with industry changes.

This is where the right digital transformation partner can be critical to a project's success. A partner can help you navigate the challenges and make sure that your digital transformation strategy aligns with your business goals.

But finding the right partner is no easy task. You'll need to vet a number of potential candidates and compare them against your specific needs and requirements.

One way to do this is by checking out popular review platforms, like Clutch, which feature feedback and portfolio information from real clients. This can help you better understand a company's capabilities and how they stack up against the competition.

Once you've found a few promising vendors, schedule a call with them to discuss your project in more detail. This will give you a better sense of whether or not they're a good fit for your organization.

2.5 Start with an MVP and a Roadmap

It pays dividends to start with a Minimum Viable Product (MVP) with any large project. The MVP aims to develop some of the core functionality while deferring other development to later stages.

Using an MVP allows businesses to iterate as they determine what works and what doesn't work in a controlled manner. With a clear roadmap outlining future development initiatives on the digital transformation project, all stakeholders can be kept informed.

This roadmap should clearly communicate what will be delivered when it'll be provided, and who's responsible for which part of the digital transformation.

It's important to make sure the digital transformation project fits within the organizational roadmaps already in place. While digitalization can cut across business units and functions, digital transformation may not align with where other parts of the organization are headed.

3. Before you invest in anything, figure out your business strategy

When preparing a budget for digital transformation, it's important to consider all aspects of the process. This includes changes to technology, processes, and people. Businesses need to account for both the up-front costs and long-term expenses associated with digital transformation.

When planning a budget for digital transformation, it's important to remember that the process isn't a one-time event. Many companies make the mistake of thinking that once they've completed their digital transformation project, they're done. In reality, the digital transformation process is ongoing, and businesses need to continually invest in new technologies and processes to stay ahead of the competition.

Another factor to consider when creating a digital transformation budget is that different businesses will have different needs. Not all companies need to implement the latest and greatest technology in order to be successful in the digital age. It's important to tailor your digital transformation strategy to your specific business needs.

In some cases going digital isn't a requirement at all and other options should be considered. A key question that needs to be answered with any digital transformation initiative is - "What benefit will this provide to my business".

3.1 The digital landscape

Many different industry verticals are embracing digital transformation already. Banking, retail, hotels and airlines are some of the most transformative industries. These types of businesses have seen an increase in customer demand for digital services.

From self-service kiosks at banks to order ahead capabilities on your smartphone while shopping for clothes or even checking into your hotel room through your phone, these are all examples of where digital transformation is impacting the end-user experience.

In addition to retail and business, healthcare is also a big adopter of digital transformation. Patients are now able to access their medical records through secure portals, communicate with their doctors through video conferencing, and even get their prescriptions filled without ever having to leave their home.


The digital landscape is constantly changing, so businesses must remain flexible and agile.

Companies must develop a process to regularly and consistently measure and evaluate their existing digital transformation initiatives so they can identify shortfalls and make any necessary adjustments. Companies must avoid making knee-jerk reactions as those could be costly decisions.

Companies shouldn't try to do everything at once, especially if the company doesn't have the staff or funds available as it may lead to failure. Businesses should set clear goals for what they want to achieve with their digital transformation initiative. They should also outline the key activities required for them to reach those goals and identify which can be automated through technology.

Digital transformation is about more than creating new digital assets or improving existing ones. It’s about making the way your business operates more efficient, cost-effective, and competitive in your market space.

Related: 10 Points of Importance of Project Planning & Steps to Build a Plan

Yaroslav Rybii

Written by

Yaroslav Rybii

COO at Indeema Software Inc.

Yaroslav is a co-founder of Indeema Software and serves as the company's Chief Operating Officer. Yaroslav has been successfully managing a range of areas for Indeema for the last 9 years. A business leader with 12 years of experience in IT industry and organizational transformation, he has helped to grow Indeema from infancy to a leader in the IoT expertise and development.