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