ROI analysis evolves

Return on investment, or ROI, continues its popularity as a metric for evaluating products and services, while both vendors and users are getting more sophisticated in their discussions about ROI.

Enterprise Management Associates has been very active in the ROI business, both in helping vendors build credible ROI arguments and in helping users evaluate the ROI arguments that vendors present.

This process is not unlike electronic warfare, where an advance in the state of the art on one side drives the next big advance on the other side. But as the level of sophistication grows on both the user side and the vendor side, the context of the discussion changes from one of making the sale to one of meeting the needs of the user for specific business fundamentals – like revenue, for instance.

In the course of this evolution, EMA has seen the factors that matter within the context of ROI analysis change as well.

Gone are the days when the basic price of a product was a sufficient starting point. Now, users think in terms of total cost of ownership. How much time, effort and support will it take to get the product installed? How much will it cost to keep the product running? Vendors, too, are learning the true cost of their products.

Users are looking for a direct connection to their bottom line, and this can take a variety of forms. From the impact on direct IT costs to the reduction of lost revenue due to outages, everything has been tried. It is actually a rare instance where an application can be shown to have a direct impact on revenue, but occasionally such things as improved CRM applications can make that claim.

One area of sophistication that is just now gaining traction is the idea of complex variable interactions. This is the situation where a cost-side impact can influence a benefit-side impact, and vice versa. For example, increased training costs might improve the effectiveness of a management application in production. In such instances, the ROI can have a complex output curve.

This brings up a final point: ROI is not generally a point in space. ROI numbers are just a particular point on an ROI function that can range from no ROI at all to significant ROI, depending on how you approach it. It is axiomatic that a very capable application installed by untrained personnel is almost certain to deliver very little value. Consumers of ROI information are becoming savvy to this idea and are examining ROI case studies with a jaundiced eye. Woe unto the salesperson who does not understand the dynamics underlying the ROI case study that is slapped down as collateral.

While the circumstances and use of ROI metrics are evolving, it is not clear if there are preferred methods for conducting ROI analysis. In an effort to understand some of these evolving dynamics, EMA is conducting a small study to evaluate the ROI landscape and refine its approach to the application of ROI methodologies. We would invite anyone who has been playing with ROI evaluations to take a short Web survey we have prepared. We would appreciate two minutes of your time in answering our questions. All respondents will be entered to win a thank-you prize (one month of unlimited analyst access with EMA). You can take the survey here: https://www.enterprisemanagement.com/survey/ROI/