Wednesday, November 08, 2006

Do ROI Calculators Add Up?

Few things have driven me battier over the years than ROI Calculators. It has always been exceedingly hard for me to believe that anyone would actually use a vendor-supplied calculator thinking that it was going to product any result that didn’t scream BUY OUR PRODUCT AND SAVE BIG!

Admittedly, when it comes to a lot of technology purchases - most office “productivity” applications and IT tools - it’s pretty difficult to prove whether any cost or time savings were actually ever realized. In any cases, new technology-based products actually make work. (How much time did you spend on presentations before PowerPoint existed? I thought so.) It’s just that they become must haves – it’s the way you have to do business.

And then there’s the dirty little secret about ROI. Sssshhhh, don’t tell: for product purchases, very few companies ever actually look back and figure out whether their expected ROI actually came through. (I call this phenomenon Lot’s wife syndrome, i.e., the belief that if you actually do look back you’ll turn into a pillar of salt. Or a bowl of quivering jello as you try to come up with your excuses for making an investment that hasn’t panned out.)

So between self-serving, all-roads-lead-to-purchase ROI calculators, and the fact that so few places actually go back and calculate whether they achieved any R on their I, why bother with the damn things?

The truth is that, whatever they do or don’t do after the fact, most prospects will need to make some type of an ROI argument to get a purchase approved. And you will need to be prepared to help your prospects make that argument.

One way is to provide a detailed write-up on where to look for sources of return. If you’re a web hoster, sources will include equipment purchase and extended support. If you’re providing some type of automation tool, the checklist will include time savings, etc. In self-defense, you may have to provide a spreadsheet or some sort of simple calculator, but note that your prospects will – or should - be skeptical of any data that you’ve got in there that is not objectively verifiable, i.e., the actual cost of your product. ROI calculators that you hire a third party to put together aren’t all that much better, since their numbers probably came from you. If there’s a third party that’s developed a generic calculator for your product, you’ll be higher up the believability scale, but these will be costly.

Also keep in mind that, if you’re making the argument that your product will cut personnel costs, it may not be all that attractive to the purchaser (unless you’re selling to the CFO or someone on the business side who’s keeping the P&L). In cases where you’re threatening the livelihood of the people you’re trying to sell to, you’re much better off if you can point towards saving on actual new hires, rather than getting rid of people.

Don’t forget that ROI is not just tied to saving money. In the best of circumstances, it’s tied to making money. If your product or service can be used to attract more customers, handle more calls, close more deals, make sure to fill in that side of the equation first. It may just be a matter of expressing the same data in a different, more positive way. Rather than say that something will decrease employee costs, state that it will enabling employees to get more done.

It seems squishy, but you should throw in the “intangibles” to your ROI argument. They may sound completely lame, but they may actually be true. Automating a pedestrian, time consuming process really will let your people focus more important things, and that really should help your business.

In the end, however you end up handling it, when it comes to ROI calculators, honesty is really the best policy. Let your prospects know what’s real and what’s theoretical. Don’t make extravagant claims, make likely cases. As always, one customer is worth a thousand words, and if you have a customer who’s willing to talk about where and how they got their ROI, by all means use this information, even if you have to disguise the company.

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