Top 10 ROI pitfalls
Editor's note: According to FutureSight Consulting's Bruce Scheer, mistakes are being made by managers and the vendors who support them when preparing ROI analyses. Where are the biggest mistakes being made when developing an ROI case? Before you invest millions of dollars in hardware, software and man-hours make sure you know if you are getting the best return on your investment. Don't write a check to any vendor until you take a look at advice from Scheer. Bruce exposes the top 10 pitfalls you may encounter when trying to determine ROI. Also, join Bruce as he answers your questions on ROI during an online Webcast. Listen to the event
1. Lack of vision and buy-in: One might ask, "why waste the effort if you don't have general buy-in from key parties involved in the decision making process?" Your time is important, so you definitely want sincere stakeholder and sponsor interest in the technology initiative, and their undivided support in developing the ROI business case, as it will take you and others a lot of time and energy to develop a solid case. Get their agreement for the ROI analysis and the effort it will require before you begin the journey.
2. Lack of professionalism: Making your ROI case speak to multiple audiences' concerns is very important. Your presentation should be designed to gain attention and cater to multiple parties with different learning styles. Use graphs, charts, and other visual depictions for more visually oriented parties. For the more analytical parties, you should definitely create an ROI scenario modeling spreadsheet or analysis tool designed to fully cover the financial analysis in a grounded, practical way.
3. Lack of in-depth ROI analysis: We strongly advise managers not to "take a swipe" at the ROI analysis. You want to address the most penetrating concerns and questions of those looking to pick apart and thoroughly test your analysis and its underlying assumptions.
4. Lack of benefits and costs articulation: Start by formulating and documenting your ideas on where the greatest impacts or benefits will occur for your technology initiative, and what the costs will be to realize the benefits. When thinking about benefits, try to put them into fiscal terms, such as "costs will be reduced by," "revenue will increase by," or "costs will be avoided by." After you've derived your benefits, shop them around with various stakeholders to get an understanding for the magnitude of the benefits and/or costs, and hunt for additional benefits or costs you didn't foresee.
5. Lack of proof: All value claims should be substantiated with facts and proof. You need to remember one of the key parties checking off on any major capital investment: the CFO. This person is normally very detail-and fact-oriented, and needs solid, demonstrable proof as part of the analysis. Find out how the CFO has been burned in the past on a similar initiative if at all possible, and address his or her concerns up front in your presentation. Do remember that the CFO doesn't often have the final say in terms of "yes," but very often can say "no" early in the process and derail the technology initiative. Cater to the CFO's concerns and try to address the negative or positive past experiences in relation to your initiative.
6. Forgetting to discount certain benefits: A common error we see is over-estimating expected labor savings and productivity enhancements. Even though you are sure that your technology initiative will greatly enhance productivity and save staff time, you should be conservative in these estimates. Keep in mind if you free up an employee's time for other activities, only part of that time savings will most likely go to improving certain aspects of the business. However, time will probably be spent fulfilling other self-interests or be time wasted in other non-value added activities. Importantly, revenue needs to be discounted by the direct costs to achieve it. Apply a reasonable contribution margin (usually revenue minus costs of goods sold) when calculating most revenue-enhancing benefits.
7. Missing decision-making metrics: Most investment analyses need multiple financial perspectives applied to improve the decision making as part of the analysis. Besides ROI, you might want to show a comparative cost analysis using total cost of ownership, look at the overall value created using net present value, analyze the "hurdle rate" using internal rate of return, and review time to pay back using payback period or breakeven analysis.
8. Lack of risk analysis: Different technology initiatives have different risks associated with them, and this should be called out as part of the analysis. This allows senior management to manage the portfolio of investments. Does your initiative require a significant front-loaded investment with a very large potential payback, or does it require smaller investments on an ongoing basis with almost immediate, incremental benefits realization? Call this out as part of the analysis. Finally, don't forget to highlight other potential risks and dependencies that could impact your ROI analysis, such as schedule slippage and cost overruns, as well as not realizing the full benefits you are expecting. This will show your analysis to be realistic and prove you've done your homework.
9. Lack of post-analysis follow-through: Technology initiatives are much more likely to realize the expected benefits when they are closely monitored and measured. Stress this point when making your presentation, highlighting the critical few metrics you will closely monitor once the project gets underway. This will highlight your commitment and accountability to the initiative.
10. Self-representation: CFOs look for an unbiased, independent perspective before putting full trust in the ROI analysis. Validate your work and assumptions with an independent source, especially for larger investment decisions.
About Bruce Scheer:
Bruce Scheer is Principal of FutureSight Consulting, a developer of ROI sales and marketing programs, including ROI value proposition development, scenario modeling tools, benchmark research, case studies and white papers to support the technology sales process.
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