Moving on from ROI

via hetemeel

via hetemeel

The first time I ever sniffed at, let alone touched an IT project, the expression Return On Investment (ROI) was never far from the conversation. Along with its bastard half sibling Total Cost of Ownership (TCO), ROI was and remains something that gets thrown into most buying decisions.

For many years, I argued that any buying decision needed both calculations as part of any proposal in order to satisfy my need to know that if someone was going to spend ‘X’ to acquire a technology, then there needed to be ‘Y’ ROI accompanied by ‘Z’ TCO. As an accountant by training it just made sense.  Otherwise, I’d argue, spend would likely spiral and rogue projects would blossom. When you boil it down, the arguments I made were all about control and was right for the time.

I’ve changed position significantly the last couple of weeks. Here is why:

  • Regardless of the extent to which one attempts to construct ROI/TCO models, they are always flawed. As Estaban Kolsky says ROI doesn’t:

…consider the strategic nature of acquiring and implementing Enterprise Software (hardware is a different animal, and a different post).  Besides, any vendor worth their salt will have a variety of models you can use, including great historical data from other implementations, to help you show there is an ROI.

  • Project failure is a constant. Some reports place failure (however defined) as high as 70 percent. Heck, one person I know crafted a career out of the topic. How many ROI calculations have you seen that adequately factor in project delay, change orders, technical SNAFUs and the rest? I can guarantee the answer will be close to zero.
  • Who revisits ROI once a deal is inked? How many businesses and agencies do you know that went back post implementation to re-assess the ROI calculations? Again, the answer will be perilously close to zero. So why bother in the first place?
  • How do you stop rogue projects in a world of ‘free’ or ‘fermium?’ You don’t. You can’t.

Is there a viable alternative? Kolsky makes the argument that:

…we are moving into a fair-value market where both (organization and consumer) value what they get from each other.  Whether its timely feedback to improve a product, help with support, or anything else organizations are starting to recognize there is value in the contributions from users and consumers that goes beyond the traditional ROI model.

Is he right?

What we are doing

The last few weeks #evilplans has been using a variety of software to achieve a number of goals and as part of a strategic plan. There are hundreds of decisions to be made along the way divided among a small team. It is complicated. Not once has anyone asked for an ROI/TCO calculation. Instead, we have been trying out solutions, often on a cost free basis to figure out what works and what doesn’t. In some cases, we are paying for services without thinking about the cost. Why? Because we simply must use XYZ in order to achieve a goal. It is the cost of doing business.

In other cases we are investing for the future. For example, we are paying for a particular content delivery network (CDN) which we can use to populate content from many sources. Some of those sources will pay for the pleasure. The service represents a strategic asset the value of which we can estimate at different price points and over time. Do we solicit recommendations? You bet. Do we make compromises? Show me a business that doesn’t.

As we are thinking through the business model, one of the key questions: how long will you invest before seeing a return? Then: what return are you looking for? This slots neatly into Kolsky’s view that  a collaborative exchange of value does not happen at a moment in time but rather over time at an estimated cost but for which value can be both fixed and incremental.

Kolsky is also correct in saying that the cost of services and software delivered via the cloud makes ROI calculations secondary to focussing upon value and time to value. This in turn feeds nicely into the concept of outcomes that Ray Wang and others are talking about.  These are far more sophisticated and rich conversations than those involving the decision to buy a new ERP or accounting solution. They are also incredibly complex and can quickly lead to brain freeze. Those conversations take time to work through and unless there is a drop dead deadline, then I am of the view that those conversations need to run their natural course.

Advice to buyers – an eight point plan

  1. ROI/TCO will not go away any time soon. Check this regarding the nose bleed expensive Tesla for unexpected outcomes.
  2. Start with the notion of outcomes. What are we trying to achieve beyond (say) a reduction in operating costs of X percent? Where do we want to be in 3, 6, 9, 12 months?
  3. Consider ROI as a starting point that at least justifies the thinking behind a particular investment.
  4. Go beyond ROI by considering future value as a stepping stone to outcomes. This can be applied in many scenarios. For instance, if looking at HR, does the thing that you are considering stop at compliance or does it have capabilities both now and into the future to change the way people work? In broader terms, Kolsky asks questions like time to feedback, time to achieve a specific deliverable. Use these thought processes to help distinguish where best to place bets.
  5. Distinguish between the cost of doing business (your accounting system) and the ability to grow the business profitably (merged information from CRM and accounting and HR)
  6. Don’t stop measuring. Simply pushing ROI to the back burner as an excuse not to measure is a bad idea.
  7. Continue to test and revise hypotheses. None of us has a crystal ball but we can use assumptions that lead us to imagine different outcome possibilities and then go back to revise based upon actualité.
  8. Get the vendors involved. It’s a conversation they love to have and will help you make better decisions, even if that means paying a higher price now. One example from a recent conversation:

We are paying a shitload of money for our Salesforce.com system but we could not be the business we are without it. The value it continues to deliver makes it indispensable.

Your POV? Let me know in talk back.

2 thoughts on “Moving on from ROI

  1. Thinking this depends on context.

    For instance;

    Part of our business is Managed Integrations. In most cases, these integrations are generally a result of a specific project we have to look at process improvement. In most cases too, it involves a distinct ROI where it costs X not to integrate and costs Y to integrate. It can also involve intangibles such as better experience, scalability, competitive edge. These, however, are secondary.

    The lines blur, however, when you are deploying Business Management Software such as ERP, CRM, Finance.

    Rarely, during product selection and recommendation, do we perform an ROI (or are even asked to do one). By the time buyers reach this point of the conversation; they have:

    a. realized to compete they need to improve.
    b. more than likely need a rip and replace because a lot of things are broken.
    c. realize it is the price of doing business.

    In this case; the questions are not so much centered around ROI; but instead focus on more value based questions such as:

    What functions can I get for my budget?
    How “future-proof” is that solution?
    What will my real costs be? – no “happy talk” from us 🙂
    What will my workflow look-like?
    What will the deployment plan look like and what resources do I need?
    How do I manage the change?
    How will my customers benefit?
    How will it scale?

    On the customer comment; Unbelievable.

    “We are paying a shitload of money for our Salesforce.com system but we could not be the business we are without it. “.

    Thinking this is too much Kool-Aid and “Happy Talk” going on there. It should read:

    “We are paying a shitload of money for our “CRM” system but we could not be the business we are without it. ”

    There are millions of CRM systems out there; the improvements are unlikely to be just salesforce.com; the improvements are more likely to be that they automated their sales cycles by adopting process change.

    Ray Tetlow
    Management Consultant (ERP/CRM)
    http://www.tacticscorporation.com

  2. I’ve heard the word TCO for quite a while now (at least 12+ years), and it’s sad now that I equate with sales talk. That being said, I agree that you need to keep measuring and keep up with the business case and do a cost-benefit analysis.

    Where I work now suits my own current thinking on being frugal; don’t make unnecessary purchases that will add costs to the customer. It helps that I am also a current customer of the company where I work too.

    I enjoyed the Tesla analysis – not in the market any time soon, but still…

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