Published in DM Review Online in April 2004.|
Printed from DMReview.com
Eye on ROI: The "ROI" of ROIby The Gantry Group
Many thought 2001 was "The Year of ROI." It was a year when CFOs firmly reentered the enterprise IT purchasing process as an integral part of the enterprise IT decision team. But most companies, while warming to the general notion of making decisions based upon value return and payback horizon, were not rigorously applying such methods because IT budgets were still constrained and they simply weren't making the investments at all. As IT budgets began to slowly unfreeze during 2002 and 2003, the allegiance to ROI disciplines gathered increasing momentum. Now, at end of the first quarter of 2004 it's clear that ROI is not going away anytime soon. ROI decision making has clearly been adopted as a best practice for technology procurement.
Why is it that unlike many other business "buzz" acronyms, ROI has transcended hype and fashion and taken its place on the list of top business principles? We think the answer lies in the "ROI" of ROI.
As more IT and technology services companies are investing in best-practice ROI tools, the value of ROI-centric thinking has begun to catch hold. No matter whether the solution is software, hardware, services or business process outsourcing the development of rigorous, credible ROI modeling tools benefit both the vendor and the buyer.
Gantry Group has polled its clients who have invested in the development of best practice-based ROI selling suite. Our goal was to identify a set of ROI value drivers that our clients use to judge their investment in these sales tools. In each client case, an ROI selling suite could include any of the following components:
What follows is a discussion about how these ROI selling suites created value for IT vendors and their customers. Just as ROI assessments begin with the discovery of the qualitative value drivers, we have isolated a set of benefits that qualitatively describe the mechanisms through which appropriate application of ROI tools will result in economic benefit.
Shorter sales cycle. Without a doubt, just about any vendor of an IT or technology-based service solution will attest to the fact that closing a sale today requires the demonstration of proven ROI. Prospects demand to know how - and when - the solution is going to affect their bottom line. Those vendors who have invested in the development of objective, market-validated ROI tools and materials are closing sales faster than they were prior to their investment. OK, but how does the buyer benefit from this? If the process of vendor and solution selection was included in total cost of ownership, the cost of all IT investments would rise. The processes that drive IT purchase decisions can be a long and arduous road of progressive disclosure. This can be partly attributed to the buyer's attempts to peel back the hype and promises to unveil the real economics of the solution. This process can be substantially hastened with a proven, credible ROI model, reducing the need for cascading meetings by bringing the real decision criteria into focus.
Improved customer satisfaction. When customers deploy an enterprise solution that truly delivers on their expectations of economic value, there is no better insurance for customer satisfaction. Solution vendors that have made the investment in ROI models and have consultatively worked with each prospect/customer to collect accurate business data to drive the ROI profile typically projected an ROI that was on target. If both parties work together in the pre-sales planning stages to more accurately capture total costs and model expected outcomes, there are quite simply fewer surprises.
Consultative selling. When informed with insight into the nuances of how their solution impacts the business processes of their customers, a vendor salesperson can transform the very nature and dynamic of the sales process. ROI selling takes a consultative approach, thus avoiding traditional "solution selling" that often pits sales personnel against the customer. ROI models and marketing materials have already educated the salesperson on the real operational issues and sensitivities of their offering. Armed with this level of knowledge, the salesperson is equipped to sell on the economic value of their offering. As one IT sales executive put it, "Without in-depth understanding of the ROI of our product - based on real before and after experiences of our deployed customers - it was like throwing darts and hoping one would stick." Leveraging the operational intelligence produced by a market-validated ROI tool, a salesperson takes on a more consultative role, working with the customer to come up with a solution that produces the most value. Simply stated, ROI selling places both the vendor and the customer on the same side of the table.
New competitive differentiator. Enterprises can benefit from competitive ROI assessment as a vendor selection criterion. In the case that a solution vendor has engaged a third party to consistently apply an objective ROI model to its own customers as well as those of its competitors, the buyer can gain much comparative insight on how competing solutions differ in their value delivery and bottom-line impact. Assuming a best practices ROI model has been developed and applied, the buyer can quickly see what drives different economic outcomes from various vendors. Rather than using broad decision criteria such as price-to-value, flexibility and availability of features, the buyer can now see exactly how specific attributes of a vendor's offer will impact their economic return. For the vendor such an investment in competitive ROI analysis provides rich detail about exactly how their competitors' solutions do or do not drive timely economic return.
Greater credibility. By investing in a best practice ROI selling suite, a solution vendor immediately improves their credibility. Obviously this is good for the vendor, but the buyer also benefits. An hour with a vendor with a believable, objective ROI modeling tool versus an hour of "sales pitch" from a vendor that has not made such an investment helps the buyer immediately hone their vendor list. Furthermore, a buyer who has worked with a vendor to fine-tune the data that is input into the ROI model will get a much deeper look at how well the vendor really understands their own solution and the buyer's business.
Getting the CFO's attention ... positively. Vendors and individuals within the enterprise who champion the prospective solution purchase both know that in today's business environment the CFO must approve any major purchase. The best way to get a CFO's attention is to speak the economic language of bottom-line impact. ROI models and customer enterprise ROI profiles are the most expeditious method to gain CFO buy-in. Solid data from a proven ROI model, augmented by a quantitative ROI case study of a comparable enterprise, will go far in gaining positive notice from the "C-suite." When the enterprise CFOs are presented with in depth ROI analyses that capture the appropriate granularity of business process dynamics, they often become engaged with the model themselves - taking full advantage of the what-if capabilities inherent in a good model. It is important to note here that the free, "back of the envelope" ROI calculators available on many Web sites is not the level of granularity to which we are referring.
Improved knowledge of the buyer's operations. When a vendor commits to developing an ROI selling suite, the vendor's sales and marketing framework evolve. First, assuming this investment includes detailed sales training in the use and underlying drivers in the ROI assessment, the sales force will begin to think more in terms of the target enterprise's business. Next, the sales pitch is refreshed to emphasize the new insight into the prospect's operational issues. The vendor achieves a new level of understanding of how the offering actually impacts a customer's business. Clearly, both the vendor AND buyer win from this process. Often comprehensive ROI assessments reveal areas of both cost and benefit that buyers were not aware of themselves. Which leads us to ...
Improved ongoing measurement of ROI success metrics. From Gantry's many customer ROI profiling interviews we have learned that most buyers do not actually know how to measure ROI from an IT investment. An objective, comprehensive ROI model can be used well past the close of a sale. Many IT vendors are further leveraging their ROI models by building special services to continually inform their deployed customers of the value received to date. Once the relevant metrics are identified, mechanisms can be put in place to easily capture post-implementation data. In fact, some vendors begin with an ROI benchmark analysis immediately prior to deployment to solidly collect a "before" snapshot of operational data. Later, usually 6-12 months following deployment, the vendor and customer together input the new data into the ROI model to capture the first "after" snapshot to gauge the solutions impact on the enterprise. This exercise can be repeated as often as the customer wishes. Vendors gain additional opportunities for "face-time" with the customer, further strengthening the relationship and customer satisfaction. Such ROI customer benchmarks are particularly crucial in light of the industry's preference for an annual subscription pricing model for both on-premise and off-premise solutions. Today, a customer is always a prospect, requiring to be perpetually resold to secure subscription renewals.
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 firstname.lastname@example.org. 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 email@example.com.
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