How do you improve the ROI * for your technology product or service? Change an assumption or two, and adjust the numbers. Add some revenue from the improved predictive analytics available in your next software release. Reduce costs by another 3% in service operations. Voila! Your business case appears stronger than ever!
And not a moment too soon, because by making some different accounting tweaks, your competitor just pumped additional sunshine into his ROI estimate, too. As did the Project Lead at your prospect’s company, who still seeks management’s approval. For now, your thoughtful ROI result patiently waits in a tiny spreadsheet cell alongside theirs, wildly different and barely credible. That hardly matters. Here’s why:
1. Technology ROI numbers are SWAG’s, at best. “The most complex variable in the return-on-investment equation—one that’s usually ignored—is the cost of the business re-architecture required to consume a proposed technology. . . Know that technology demands business transformation, and that’s usually the largest hidden cost,” Coverlet Meshing wrote in InformationWeek. (Why Tech Projects Fail: 5 Unspoken Reasons, April 22, 2013)
2. ROI rarely drives investment decisions anyway—we just assume that it does. “In most companies, determining the potential costs and benefits of a tech investment is neither art nor science,” he wrote. “Rather, it’s an elaborate and often dishonest marketing exercise (upward and outward-facing) aimed at persuading senior stakeholders that one [project] should win out . . . The unintended consequence in IT is that project funding more often goes to mildly technical marketers and shameless salespeople, not to hard-core engineers and scientists who let the data drive.”
3. Projects are usually long-term, but accountability is short-term. According to the article, within companies, “there’s a structural incentive for career mobility. Long-term projects are consequently damned if you move and damned if you don’t. The usual response to this short-term culture, a three-to five-year vesting period for bonuses, doesn’t actually encourage long-term thinking.”
4. ROI estimates have a shelf life that compares more to fresh fish than to Hostess Twinkies. “. . . your business conditions, the most important context for your IT projects, change faster than the project. It’s why users often reject technology that gives them what they asked for: by the time the technology is delivered, it’s no longer what they need,” according to Meshing. The unspoken truth: “Sure—give us your best ROI estimate. It’s borderline meaningless. Six months from now, your projections will be OBE (Overcome By Events).”
“My ROI‘s bigger than your ROI!” Do you really want to go there? ROI calculations yield results that are shockingly easy to eclipse. Even a summer intern can create amazing ROI improvements through simple, perfunctory adjustments to the equation’s numerator and denominator. “That server upgrade would be required no matter what they decide. We can exclude it from the capital investment . . . Should we expense 100% of the data migration costs up front, or amortize them over the life of the project? If so, how many years should we assume? . . . Do we embed application training into the project costs, or expense it separately, as Ongoing Staff Development?” Isn’t math great?
Nobody should assume ROI calculus is precise, consistent, or fair. Call ROI anything you want, just not objective. ROI must be considered in the context of strategic decision making—it’s one of many tools and criteria, not an endpoint of financial analysis.
In my next blog, I’ll share three elements technology marketers can use to support a strategic and financial case for their product or service.
* ROI = Average annual operating cash flow divided by net investment. The equation does include variables for risk, time, or cost of capital.