Habla español? Sprechen Deutsch? How about business speak?
Do you know to speak the language of business to your executives?
In a previous post I talked about “ 4 Tips for Engaging Your Executives in SharePoint. ” However, I didn’t talk once about ROI, or rather, Return on Investment.
In that case, you were seeking a problem and trying to solve it so someone else would have worked up an ROI, but what happens when the business asks you for an ROI, the language of business?
Keeping ROI Simple
At its core, an ROI analysis is focused on defining and quantifying the costs of a business problem and comparing that to the costs of the solution. When the costs of the problem that will be resolved are greater than the cost to solve the problem, there is a positive ROI.
The trick here is that an ROI is based on one-time costs and recurring costs. The question is, how long will it take to recover the costs of the solution in the reduction of recurring costs?
So consider a practical example from your home. You go to one of those furniture rental places and you rent a TV for $100 a month. The TV would have cost you $1,000 to buy. So after 10 months, you could have purchased the TV. The straight-line ROI for buying the TV when compared to renting it would be 10 months.
In many businesses, there are factors that complicate this a bit. For example, internal rate of return, or effectively how much the organization makes on money it doesn’t spend.
There are also things like net present value and discounted cash flow, but honestly, all of this is stuff the finance department or your CFO will help you with once you get the basics of the ROI put together. The factors we’re starting to get into amount to cash management which is what the finance department is around for anyway.
Lies, Damn Lies, and Statistics
The problem with ROIs are that you have to make assumptions. You don’t really know how much money the solution will save. You estimate that you’ll save an hour per person per day in effort, but will you really save an hour or will you save thirty minutes?
Well, let’s assume that the fully loaded cost of the average employee is $50 per hour – including wages and benefits and other administrative expenses. Let’s say you have 1,000 employees. They’ll work an average of 240 days per year (52 weeks, 2 weeks vacation, 2 weeks of holidays and overhead, * 5 days a week).
So that leaves you with a projected savings of $12 million. That sounds pretty good.
There are a few problems with the preceding. First, saving an hour a day is a 12.5 percent increase in productivity. That’s a pretty big jump, so maybe a 30-minute increase is more realistic. (You’re down to $6 million.)
Second, are you really going to save it for every employee or just the office workers? If it is just 100 office workers, you’re down to $600,000. Simple items like this can quickly cut a number down to size. They’re the numbers that the CFO knows to look for.
Another issue is the difference between hard and soft costs. Hard costs are things like the rent. You know you won’t have to pay rent if you buy the building. Soft costs are mostly saved time. It’s hard to determine if the business is going to get more out of an employee if you save them that time. Soft costs are where you’ll theoretically see the big values but the business is skeptical about the ability to convert soft costs in to hard dollar savings – with good reason.
The key point here is that you can make the numbers say anything if you just tweak the assumptions a bit. That’s why there are lies, damn lies, and statistics. ROI calculations lead you to a false sense of stability, but in reality they’re not saying much.
There’s real value in the process, it’s just that the value isn’t in the outcome. The part of the process that adds value is understanding the problem you’re solving and the impacts of those solutions.
Let me say that again: it is not making up numbers, its understanding impacts. Often it’s better to avoid hiding behind a complex ROI calculation and instead communicate a clearly articulated and emotional message about the problem being solved.
For example, perhaps the message you’re sending is that you can reduce overtime by improving efficiency. Here you can talk not about the reduced overtime costs, but instead talk about the impact that overtime has to families or the inevitable employee turnover that it causes.
You don’t have to put a specific ROI on business decisions that “just make sense.” If the organization is working to reduce employee turnover, the understanding that reducing overtime will reduce employee turnover makes sense and you may not have to put a percentage on it.
The point of a un-ROI isn’t that you ignore the value of solving the problem, but rather that you focus on the problem more. You stop putting together non-calibrated estimates against something you can’t know and start to focus more on the impacts and interactions of the changes. So in conclusion, more time analyzing the problem and less time making up numbers.
While formal ROIs are still necessary in some organizations, perhaps it’s best to start with a un-ROI.
About the Author
Robert Bogue is a Microsoft MVP for SharePoint, an internationally renowned speaker, and author of 22 books including the SharePoint Shepherd’s Guide for End Users. You can find out more about Robert’s work to encourage business value out of SharePoint at http://www.sharepointshepherd.com/ or more about his technical solutions at https://www.thorprojects.com/blog.