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Eye on ROI:
Buying with ROI - Your Vendor's ROI and You

online columnist The Gantry Group     Column published in DMReview.com
April 28, 2005
 
  By The Gantry Group

Solution providers - technology vendors and managed service providers - have scrambled to revamp their strategic messaging and marketing programs to communicate bottom-line value instead of the unsubstantiated soft-speak hype encouraged during the Internet era. Today enterprises only want to hear about what the technology solution - whether it is on premise, hosted or completely outsourced - will do to improve their business performance. In other words, how will the solution create economic value? This appetite for proof of value is pervasive throughout the enterprise community, no matter the industry. According to an IDC study in 2004 that polled software vendors and buyers, "72 percent of software vendors and 70 percent of software buyers strongly believe that the software industry must place a greater focus on clearly establishing the business value of software." ["Future of Software Licensing", IDC, March 2004] Solution providers' abilities to meet revenue goals, whether their offering is a product or service, are clearly dependent upon their ability to demonstrate solution value.

"Selling with ROI" has become the new mantra in the technology sector. ROI calculators have become standard equipment for the sales organization. But just how effective are ROI programs and how well do they model your business? More to the point for the buyer, to what extent can a vendor's ROI model be believed?

The ROI Alternatives

Technology solution providers are making large investments in ROI programs, measured in both outlaid money to third-party consulting firms who develop the programs and the internal resources that must be dedicated to the effort if it is developed in house. As a result, chances are if you are shopping for a technology solution, an ROI calculator is likely to be part of the sales pitch.

When presented with a vendor's ROI calculator developed by them in house, most organization's are skeptical about two things:

  1. The credibility of the ROI results. (Will it be biased in the vendor's favor?)
  2. The ability of the ROI model to reflect how the solution will impact the customer at the business process level. (Do they really understand my business?)

Alternatively, vendors who have commissioned an objective third party to develop their ROI calculator, the concern for organizations is more centered around how well the tool models their business.

While we cannot opine on the validity of whether ROI models developed in house by the vendor are biased, we can certainly shed some light on customer concerns about how well a model "models" their business.

Drivers of ROI Accuracy

Whether developed in house or by an outside third party, reliable ROI calculators should be developed on a fundamental tenet: they should be built based upon the real ROI experienced by actual customers who have implemented the solution for at least 12 months. If you are considering a vendor who is trying to sell you on the ROI generated by an "off the shelf" ROI tool, be warned. Because every vendor's solution is different and, therefore, can impact different business processes in unique ways.

There is no such thing as a generic ROI calculator for say, data warehouses. Some ROI calculation models available today may have been developed using input from actual customers of a generic solution category; but without drilling to the level of a given vendor's offering features and capabilities, the customer feedback will be highly subjective, intangible and high level. (We refer to these types of tools as the "Got ROI?" calculator approach). Results from an ROI calculator not customized to the offering of each vendor should not be used as a serious criterion for vendor selection because the level of analysis driving the ROI output is too high level.

The first thing to examine when a vendor approaches you with an ROI tool is the section where your current data is captured. The questions you are asked about should demonstrate an in-depth understanding of the relevant business processes in your organization. If the main questions are all focused on head count and annual salaries you are probably not going to be happy with the final output of the calculator. As you know, your bottom line is affected by more than just labor costs.

The other issue with vendor ROI projections is around what the forecasted improved metrics are based upon. Assuming you feel comfortable that an ROI calculator accurately models your business processes, capturing your "before" scenario (e.g., prior to implementation with your current systems) should not be a problem. The next thing to consider is how the vendor sales rep is estimating the likely incremental improvements that drive the ROI. Are these estimates based on gut feel, industry-specific benchmarks published by analysts or are they based on average changes in performance metrics that real customers (deployed for more than 12 months) have actually measured? If the answer is not "real customer experience," again, the resulting ROI is not something that should drive your decision to buy.

The ROI Profiling Session

If not already offered by the vendor, request that an ROI profiling session be set up so that you can work collaboratively with the vendor to populate the calculator. (Let's assume you know the calculator has been built based on real customer experiences and that there are at least 10 customers being represented). The old adage "garbage in, garbage out" is highly applicable to ROI modeling tools. It is worth spending the time to collect the best data you can that accurately reflects your current relevant expenses and business performance metrics.

During this session, it's important that the vendor not only to communicate the bottom-line impact data, but also the solution's key value drivers that make this impact possible. You must believe that the solution can, indeed, deliver on the ROI promise. Doing such sessions well necessitates a time commitment. Be realistic about the time required to brief your colleagues about the data needed to complete the ROI profile, conduct the ROI profiling session and then follow up to deliver the final ROI report to your upper management.

If the vendor sales rep is tentative about the ROI calculator or cannot answer your in depth probing questions (which you should ask) about its inner workings, pay attention. Request a meeting with another representative until you get someone who can directly answer your questions and who knows what the drivers of ROI are. If your vendor cannot articulately and knowledgeably discuss the ROI calculator - whose results they want you to believe - you should see a red flag and act accordingly.

Some solution providers outsource the ROI profiling task. Companies that specialize in doing technology ROI assessments are top candidates to provide objective, accurate ROI profiles for buyers. In this scenario, the ROI outsourcer becomes an adjunct to the solution provider's sales force, ready at any time to be called upon to profile a customer's realized value post-deployment or to forecast a prospect's expected net benefits. The net effect is that the ROI Profiling Service immediately "ROI enables" the sales force and the ROI tools are put to their intended use. Solution providers maximize the ROI from their investment in the ROI program by outsourcing the application of the ROI tools and customers maximize the likelihood that the results will be truly objective.

The Bottom Line

When considering a vendor's offer to run an ROI model for their proposed implementation, consider the entire ROI program, not just the ROI tools. Before sitting down for the ROI profiling session, ask to read any ROI case studies that are based on the application of the same ROI calculator to real customers. If all the case studies are about companies in very different industries than you or companies that are of significantly different sizes than your organization, you may want to take what you read less as an indication of what ROI you may realize and more as an indication of the depth and granularity of the ROI analysis. White papers can also be helpful to put the vendor's solution in the context of how your key business challenges may be affected by the implementation. (After all, if a solution is not going to help you address your primary business imperatives then it is likely not well aligned with your corporate goals. If this is the case you may want to rethink why you are considering a given technology solution category in the first place.)

Additionally, when you are working with the vendor on the ROI profile insist that they run some what-if scenarios to produce a best and worst case result. This will at least give you a range of expected benefit that will be more useful - and believable - than a specific number.

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For more information on related topics visit the following related portals...
ROI.

Dawna Paton and Dale Troppito are managing partners of the Gantry Group. Paton has helped guide the Gantry Group's rigorous ROI best practice models based on a 25-year career as chief executive officer, CFO, sales and marketing executive, and venture capitalist in high technology companies. You can reach her at dpaton@gantrygroup.com. Dale Troppito, company cofounder, believes that the technology leaders of the future will be those that understand the crucial role that a market-validated, value delivery strategy and compelling ROI play in shaping corporate competitiveness and customer satisfaction. You can reach her at dtroppito@gantrygroup.com.



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