The cheque is in the mail, I’ll respect you in the morning and your email system will generate a 125% ROI in ten months.
November 12, 2009 | By Mr 1% Spend  

EDITOR’S NOTE: This is the first of two posts on ROI. The second will be published early next week.


Alphablocks, Jeremy Burgin, flickr, Return on Investment, ROI, Anthill

I want to talk about my favourite “marketing speak” glossy brochure metric: Return on Investment (ROI). I love ROI numbers. They’re usually huge, massively huge, and almost always never repeatable outside a PowerPoint slide.

The return on investment argument is always entertaining. Usually, the ROI numbers quoted in the brochure look too good to be true. That’s because they are. I mean really, if these numbers are right, some of these products pay for themselves about a millisecond after you’ve implemented the product.

Over the years I’ve come across ROI numbers in the thousands of percent and they look great (weird but great).

To really understand these numbers you’ve got to look at the assumptions they make, like “this ROI is only indicative and was achieved by calculating the number of people working on the 29th of February multiplied by the amount of work they normally deliver on a Saturday while all existing computer systems are down for maintenance and comparing that to the amount of money we believe that you will save using our software.

In other words, it’s a bunch of numbers invented by the marketing guys and then given substance by creating a scenario to support the desired end result. Most of us know this as spin or, more bluntly, bullshit.

Just for the sake of interest, have you ever seen the assumptions used in any of the ROI numbers you’re usually presented with? Nope, I didn’t think so.

I want to talk about the ROI on Microsoft Exchange. There’s a white paper out there about the ROI on an Exchange implementation where they talk about 125% ROI in 10 months.

In English, this means, assuming this solution cost $100,000, its going to return to the business $125,000 in 10 months. Smells too good to be true.

This makes you ask questions like, “How in the hell does an email and calendaring system deliver that sort of return in 10 months?” And, “If it does, why don’t we all go into business installing Exchange; we’ll retire rich beyond the dreams of avarice if we tie our fees to the expected ROI of implementation.”

Since I like to call a spade a shovel, lets go back to our ever-helpful dictionary and look up Return on Investment. The definition is a bit longer here so just follow along and then we’ll get to the fun…

Return on Investment is a measure used to look at the efficiency of an investment. To calculate ROI, the return is divided by the cost with the result shown as a percentage.

The ROI formula is:

roi equation 580wnative The cheque is in the mail, Ill respect you in the morning and your email system will generate a 125% ROI in ten months.

Return on investment is a very popular metric because it’s simple (so marketing guys can get their heads around it) and flexible (so marketing guys can use it any way they want).

Basically, if something doesn’t have a positive ROI, or if something else has a higher ROI, then its bad and you should walk away from it as fast as your legs will carry you. So to make this work as a marketing strategy you’ve got to come up with an ROI scenario that gives the number you’re looking for

In my next blog post we’ll have a look at an example of how ROI is used to sell you stuff and will guarantee that your company, your users and your management team will be totally dissatisfied with the results of your “investment”.

The 1% Spend is written by a prominent Australian I.T. consultant who is choosing to remain anonymous (and candid).

Photo: Jeremy Burgin

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6 Responses to “ The cheque is in the mail, I’ll respect you in the morning and your email system will generate a 125% ROI in ten months.”
  1. Kim W says:
    November 12, 2009 at 9:44 pm

    Interesting point of view, and I understand there is a second part on the way which may get to a conclusion. As an (online) advertiser, ROI is everything, but only the ROI that I can calculate based on my own numbers. I basically ignore the so called ROI numbers presented to me by media. I have had “low CPC” presented to me as the “ROI” by presumably reputable media sellers. Many of them just don’t get it, it’s all about how much it costs me to get a qualified lead or a sale, not how many eyeballs that see my ad.

    BTW – being anonymous and candid is a contradiction in terms IMHO.

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  2. Sirwin says:
    November 14, 2009 at 8:07 pm

    Strong statements written by a “prominent IT Consultant who chooses to remain anonymous”. What’s up with that? Have the balls to say who you are and stand by your word if you are going to be calling bullshit on others.

    First off, the assertion that ROI calculations are “a bunch of numbers invented by the marketing guys” is a wrong. Stating that is to ignore that ROI is a common metric used by finance executives (not the marketing guys) to evaluate all significant investment decisions – not just IT. For those of you who’d like to get the correct definitions and not the high school version produced here, here is the link below from Wikipedia.

    http://en.wikipedia.org/wiki/Rate_of_return

    Secondly to debunk ROI calculations just because some of the assumptions produced by the vendor are outlandish is to also say that the purchaser has no responsibility to conduct their own ROI analysis. Anyone who has actually been in the IT industry for a while will know what the true parameters within which ROI numbers fall. They will also know that the ROI number in itself is just one of the financial parameters that is considered in a business case and should never be taken alone as the basis for a decision. As such the following statement from the writer is naive and misleading; “Basically, if something doesn’t have a positive ROI, or if something else has a higher ROI, then it’s bad and you should walk away from it as fast as your legs will carry you”. A positive ROI alone is not an indicator of anything. Time to return, the quantum of capital required, ongoing opex are just some of the other factors that are as important.

    Ironically, the writer falls into the same hole as the marketing guys he criticizers by placing an importance on ROI as the sole decision metric. Maybe the marketing messages got to him even though he didn’t know it 

    As for his argument specific to Microsoft Exchange that if the ROI numbers were so good everyone would be doing implementations of email systems, I should let him in on a well known secret – everyone IS doing it (everyone except the Prominent IT Consultant apparently)

    In fact there are literally thousands and thousands of systems integrators globally who make their living installing and maintaining Exchange Servers and an equal or greater number doing so with Lotus Notes. Every IT service provider of any size in Australia and globally will have a capability to deploy Exchange or Notes. This is bread and butter stuff in the IT Consulting world. Have a look at the link below for a list of service providers supporting Exchange. A similar list is available for Notes on the IBM site.

    http://www.microsoft.com/exchange/2010/en/us/system-integrators.aspx

    So, since you like to call a spade a shovel, I’d like to ask you to get your facts right before you make bold assertions hiding behind an anonymous alias.

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  3. Dan says:
    November 16, 2009 at 11:08 am

    Now we see why it is anonymous! The sledging has started. Keep your head down and keep telling it like it is!
    We all have google and when someone uts forward an arguement we can check it. The simple statement that usually the assumptions are not stated is the big sell here. How can we check the facts from people trying to sell us stuff if we get the glossy version without the detail!

    I always wonder about people that such things as TVs for example and buy on the glossy brochure without reading the specs. It can tell you a lot.
    Get into the detail or pay someone to do it for you, the differences will amaze you in all areas of business!

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  4. Jack Delosa says:
    November 17, 2009 at 8:39 pm

    Best headline I’ve ever read!

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  5. Steve Hartley says:
    November 18, 2009 at 5:41 pm

    Marketing guys telling bullshit? – never!

    I do (mostly) agree with Sirwin – the ROI for whatever its worth is one of if not the key metric most marketers and CFO’s want to know. The underlying assumptions should be made clear though and as suggested above most serious businesses are going to do their own evaluation and factor in the slight possibility that the marketing guys will be presenting the best case scenario (see that’s nicer than saying bullshit).

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    Mr 1% Spend Reply:
    November 18th, 2009 at 8:58 pm

    Strangely I agree, most marketers and CFO’s don’t see it as the key metric. Most boards do look at the ROI on any significant Capex particularly in the technology space.

    My point was that if you’re putting a white paper out there that’s claiming a 125% ROI as justification for installing or upgrading an e-mail system (or any other product for that matter), you better have some real solid assumptions clearly documented.

    So what metrics are being used out there to measure the benefit to the business of their technology spend?

    [Reply]