Wednesday, February 13, 2013

Sometimes, Common Sense Beats ROI

Return on investment (ROI) is supposed to be the magic that makes any software sell instantly - the ultimate silver bullet for any sales person. You simply offer a logical, monetary justification of the solution’s value and the customer has no alternative but to buy. Right? Yeah, right...

The reality is that ROI can be a very elusive value proposition. For one, it rarely considers any competition. You have a problem and you can solve it by reducing your cost by x% for the price of $y which represents the initial and ongoing fees for the solution. Well, chances are that the competition has a similar solution and - what an audacity - they claim the same cost savings! It will be rare that your solution has a quantifiable capability that results in a unique and competitively differentiated ROI.

More often than not, your competitive advantage lies on a different level - product architecture, user experience, quality of service, or...ehm...price. Sure you can argue that each one of those characteristics too has an ROI but now you start overlaying one ROI calculation of a solution characteristic on top of business value ROI which is probably going to be too complex and less and less credible.

Let me give you an example. Say that the solution in question has to do with accounts payable where we know the cost for processing each invoice and a proposed solution results in a 15% cost reduction per invoice. Every CFO usually knows the number of invoices processed each month and the resulting savings can be compared with the cost of the solution and voila - we have an ROI! Pretty easy, right? But of course, every competitor can claim similar savings, assuming the cost of the solution is comparable.

We could in theory add a set of ROI calculations that estimate the savings of a particular user experience compared to the competition, or the savings resulting from a better product architecture but let’s face it, this will be a tough one to make credible.

That brings me to the main issue with ROI. Some solutions - like my accounts payable example - have a very measurable, credible ROI. Others don’t. Usually, anything to do with knowledge worker productivity or customer experience is difficult to measure. Often, it is impossible - or impossible to make credible.

Just take knowledge worker productivity (or effectiveness) which is a frequently quoted value proposition. What’s the ROI of the telephone on your desk? Or the wi-fi network in your office? How about the ROI of email? It’s hard to argue that these tools don’t contribute to the knowledge worker productivity but the benefit is so obvious that we just don’t bother calculating it. Sure, we can calculate the ROI moving from traditional PBX phone system to Voice-over-IP (VoIP) phones. But we don’t need any formula to justify purchasing phones for every employee.

Any calculation that deals with knowledge worker’s time savings is dubious. Sure, a transactional type of work is really measured in hard numbers but most of the knowledge workers are switching between tasks, going to meetings, spending time brainstorming, thinking, creating, and communicating with others. It is not credible to argue that because a particular solution saved 30 minutes a day, it results is a measurable productivity increase.  

The bottom line is that ROI is not a magic bullet. It may very much help to establish the need or even justify the purchase for certain types of solutions. But there are many solutions purchased not because of an ROI: communication, collaboration and social software, knowledge management, document sharing, office and personal productivity applications - all such offerings are usually purchased because they just make sense rather than as a result of a hard ROI.

Don't sweat the ROI too much. Because sometimes, common sense beats ROI.


  1. ROI isn't always the right metric to use, especially for non-profit, healthcare, and government use cases where positive outcomes can't be directly related to profit and revenue. And truly ubiquitous technologies represent a baseline rather than a true "investment" in the company.

    But even with collaboration and knowledge management, I've seen situations where these technologies lead directly to significant time reductions in project management and complex sales. That time is a quantifiable savings or accelerated revenue contributor.

    In addition, implementation time, integration, training, ongoing support, upgrade costs, mobile ubiquity, speed of adoption, and ease of scalability often differ substantially even for "comparable and mature" competitors.

    So, yes, ROI isn't everything. But there are aspects of differentiated ROI that are more important than others. Replacing a 10-year-old solution is a baseline ROI that anybody should be able to provide. Providing key desktop and mobile functionality with full data integration and 50% employee adoption in 2 weeks throughout a large enterprise vs. 3 months leads to many differentiated ROI opportunities.

    1. Thank you for commenting, Hyoun! I absolutely agree that there are use cases where collaboration or social software results in a tangible ROI. But it is not always the case and sometimes, that's just OK.