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Hey Presto! Watch me pull an ROI out of my hat!


In his previous post, 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, Mr 1% Spend explored the idea that Return on Investment (ROI) is a concept manipulated by marketers in order to produce irresistible investment propositions. Here he expands on this topic with an example of this technique and how it will leave you, the customer, completely dissatisfied.

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

Following on from my last blog post on how Return on Investment (ROI) works, you need to remember that the calculation can be modified to suit the situation, and it all depends on returns and costs and how you define them. This creates a sandbox for marketers to play in when they attempt to measure the profitability of an investment based on a set of variables that they can define for themselves.

This is how things get interesting. A financial analyst might look at the ROI of an opportunity by dividing the projected net income of an investment by the total value of all the costs that have been sunk into that investment.

On the other hand, a marketer looking to sell you the latest, greatest flagship software product might use a completely different set of assumptions resulting in a projected ROI that makes a CEO whip out a chequebook at the speed of light.

Now I’m not going to even look at the fact that this metric is used to calculate the efficiency of an investment, and we know exactly how much of an ‘investment’ technology is from an earlier blog post, but for the sake of entertainment let’s just keep going.

I’m going to use the Microsoft Exchange ROI paper that I mentioned in my last blog post to show you how these simple numbers get twisted in a Godzilla-sized steaming great pile of marketing-speak.

Looking at this study, the ROI is indeed 125 percent if you include all direct and indirect benefits. However, if you only look at the direct benefits, the ones that can be clearly tied to the deployment of Exchange, the ROI freefalls to minus nine percent. I’m also assuming that this is calculated across the same period. Therefore, taking Exchange on its own, and supposing that you spent $100,000 on it after 10 months, it will have ultimately cost you $109,000. Woo Hoo! Let’s all go out and get Exchange right now! Who’s with me?

Yeah, yeah, I know, you’re asking about all the indirect benefits that come from implementing Exchange. Let’s look at that.

According to the study, the direct benefits arising from implementing Exchange comes from “…cost savings from assigning existing Exchange administrators to other tasks and calculated by the savings based on average fully loaded costs of employees, multiplied by a correction factor to account for inefficient transfer of time and subtracted from time saved to additional time worked”.

In English: the direct benefits from this rollout actually cost the business more than what it was paying before — so those indirect benefits better be knights in shining armour riding in on an ROI that justifies the project.

I just don’t get it! Our direct benefit is that we shift these guys out of working on Exchange problems, but the direct benefits of the project give us a negative return on our ‘investment’. This sounds like investing in phone systems.

New software with less staff equals more dollars flushed down the toilet.

The actual indirect benefit must actually calculate out at 134 percent over 10 months to get back to 125 percent, inclusive of the nine percent negative ROI coming from direct benefits.

The ROI of the indirect benefits is calculated by including the lost downtime of the previous system, recovering deleted and accidentally deleted mailboxes, mailbox creation and backup and recovery testing. I’d have to assume that they were running a previous version of Exchange given that the direct ‘benefits’ came from assigning existing Exchange administrators to other tasks.

What this proposal is really telling me is that this magnificent ROI was calculated on the benefits of fixing the problems that they had with their previous software by replacing it with an upgraded version of the software that caused all the problems in the first place!

So would you want to be a shareholder in any company that buys into this?

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

Photo: Jeremy Burgin