Over the years, my clients and I have faced a vast number of ROI interpretations. On one project, the project leader insisted that the four minutes saved on boot-up time translated into a $40M savings over the course of a year. On another, the client told us that it didn't matter what we discovered; they were going ahead with their installation anyway. They just wanted us to come up with some numbers detailing why they should.
These experiences, and others like them, forced me to think about ROI analysis as a whole. Many companies sell the service, and more will charge you to learn about it. But what are we really doing? I wanted to look at whether it's a valid analytical pursuit, a communications vehicle, so much sleight of hand, or something real in its own right.
The purpose of ROI
As with all forms of communication and analysis, we first have to establish what we wish to accomplish. In an ideal world, our answer would always be "to find the correct answer." In the real world, ROI analysis encounters the business, personal, and political agendas of a large number of people in any given organization. This encounter between abstract theory and the intense pressure of business should lead to predictable project goals.
Going back over my files and client experiences, I found three general reasons for ROI analysis:
- Justification of an existing project
- Rationalization of a previous expenditure
- Persuasion to take a specific course of action
Roughly half of the ROI projects fell into the first category. In these cases, the CIO wished to loosen the budgetary or political constraints on an existing project. The stated purpose of the analysis was to identify whether to go forward with the project. The unstated assumption was that we would find for the invested political capital. Often, our client asked us to demonstrate a need to increase the project's budget to allow access to these "remarkable savings.”
A quarter of the projects fell into the second category. In these cases, the CIO put himself in political hot water. He invoked the ROI analysis to justify his past decisions and to show his skill in planning future projects. Findings that didn't support these purposes came into hot dispute.
The final quarter of the projects fell into the third category. In these cases, the CIO needed tools with which to argue for a favored course of action. These projects always bothered me professionally, because sometimes my analysis supported my client and sometimes it didn't. In either case, the success or failure of the ROI project hinged on successfully choosing the most persuasive arguments.
Three areas of ROI
Understanding what we were doing put me halfway towards a new understanding of ROI. After further review of the three categories, I discovered a clear pattern. Regardless of the ROI method used, the client's need usually revolved around the justification of specific courses of action (past, present, and future). Therefore, rather than treating ROI as a pure analysis tool, I started to regard it as another method of persuasive communication.
In that light, I reexamined my training in ROI analysis. That reexamination revealed that I knew of three basic areas to look at for return:
- Reduction of existing costs
- Avoidance of existing costs
- Reduction of the cost of entry to a new profit stream
Most of the literature talks about cost reduction: how we generate ROI by cutting into downtime, removing performance barriers, and eliminating service calls. Fundamentally, cost reduction is only modestly persuasive. It suggests that the way we are currently doing business is wasteful and that another way generates budgetary results.
Cost avoidance is even worse. It assumes that we "make money" by somehow removing a risk or barrier. The consultant who insisted four minutes a day boot-up time translated into $40M a year represents a classic example of this kind of thinking. Although legitimate examples of cost avoidance exist (avoiding downtime during financially critical moments in time), these are few and far between. Even downtime avoidance, the holy grail of ROI, doesn't really pan out in many cases—99.999 percent uptime doesn't mean that the uptime is productively used or that the downtime would have effected an actual revenue-generating transaction.
Of the three, only the reduction of cost of entry into a new profit stream struck me as being a persuasive support. This kind of ROI comes from technologies that allow companies to reduce the actual cost and risk of exploiting new opportunities. They include reducing time to configure for a new market, time to fill the order, the product design cycle, and the internal resistance to change.
Probably the best example I encountered of this last category in infrastructure came from a Web-farm proposal: The client wanted to move from independent servers interfacing with the same database to extremely cheap servers attached to an EMC disk array. In doing so, he reduced the cost to create/deploy a new site (internal or external) from $15K to $2.5K. This moved the purchase decision from the CIO to the IT manager level and cut out about half of the approval process. Total time saved per instance: 20 hours over three weeks.
Historically, the company requested between seven and 12 of these projects a year, with each project assessed for success or failure at the six-month mark. Total savings to the company, on average, per year: $125,000 and 200 hours of executive time (about 5 weeks). This IT savings helped to offset the other costs associated with new market development, eventually resulting in a lower cost of entry overall. It also reduced the decision time for each project by cutting away layers of management. This in turn reduced the political fallout from failure. The new projects had considerably less visibility and, correspondingly, less impact on the political landscape.
To get to these benefits, the company ended up spending $20K upfront expanding an existing storage initiative. They allocated the budget within a week of receiving the report.
This evolving conception of "ROI as communications" slowly altered how I saw its role in the organization. Rather than being a panacea for financial stability, it became just another tool in the arsenal of communications tactics we use. Beyond panicked self-justification and hopeful confusion, ROI does allow us to demonstrate clearly our connection (or in some cases, disconnection) to the fundamental business strategy: making money by assisting our users while selling our product.