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
- ROI/TCO will not go away any time soon. Check this regarding the nose bleed expensive Tesla for unexpected outcomes.
- 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?
- Consider ROI as a starting point that at least justifies the thinking behind a particular investment.
- 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.
- 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)
- Don’t stop measuring. Simply pushing ROI to the back burner as an excuse not to measure is a bad idea.
- 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.
- 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.