Passing the ROI Test: A Three-Tiered Model For Obtaining Project Funding
Why should we buy this? That might be the most frequently asked question in business today, given the current economic climate and competitive landscape. Provide the right answer to this question, and you'll win the support -- and, more important, the purchase order -- you need to move forward with a BPM implementation. Fail to answer this question in compelling terms, and you will have to live with your current circumstances.
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How you go about building the case to support a desired technology purchase affects whether the decision is "yes" or "no." To convince others that an investment in technology is worthwhile, you need skills beyond those you learned in accounting class. Finance people tend to be good at discounted cash flow analyses and finding the internal rate of return, but many forget that in the corporate world eyes glaze over quickly when, for example, accountants delve into the nuances of how they selected the discount rate used in their model. These details are not what senior management wants to hear. Decision-makers want to know why a software purchase makes good business sense -- how it will improve results. No matter how sound the underlying analysis is, straight talk, defensible data, and compelling arguments are key to winning approval.
Unfortunately, there is no one-size-fits-all-occasions model for making a convincing tech-investment presentation. For example, it doesn't make sense to spend a month building a rigorous business case for purchasing a $200 external Zip drive. The value of the hours you would devote to that exercise would far exceed the proposed expense; a simple "I could sure use a quick way to back up my files" argument should suffice. On the other hand, if you want your company to invest a million dollars in a budgeting and planning tool, your case had better be buttoned down when you present it to senior management.
The time and effort you should put into developing an ROI argument depends upon your unique circumstances. That's why The Buttonwood Group has devised a three-tiered system for convincing decision-makers of the benefits of a particular software purchase. You can choose the level of analysis that represents the best fit for your situation, then tailor it as appropriate.
Before getting into these ROI models, though, I should note that in some circumstances a gut feeling can suffice -- as in purchasing a $200 Zip drive. Over time, people build up a valuable set of experiences and can make effective decisions on that basis alone. A justification based on a combination of knowledge and intuition may be appropriate when there is a widespread and passionate sense among decision-makers that something needs to be done. However, be careful not to underestimate the need for data in decision-making. Especially important in purchase decisions is cost-savings data, the subject of our first analysis.
Level 1: Cost-Justified ROI
The most common approach people take when trying to project the ROI of a proposed solution is to focus on potential cost savings. This isn't surprising, since potential cost savings often provide the most vivid and tangible rationale for making a business investment. Nevertheless, many software purchase proposals fail to persuade because their underlying assumptions are not grounded in defensible data. Costs are estimated on the back of an envelope, and projected savings appear to be wishful thinking. Net result? Senior management does not buy in, and the project doesn't receive approval. There is a way, though, to build a solid case for cost savings. Our cost-justified ROI model is predicated on the notion that the only truly defensible justification for investing in new technology is to cut costs.
What types of cost savings can we assume, and on what basis do we make those assumptions? These two questions get at the heart of cost-justified ROI and represent the two most common areas of probing during senior management review of proposed investments. The most important and valuable tool for making the cost-justified case is solid benchmark data. After all, it's one thing to know that your organization's cost for some process is $1 million, but it's another to know how that compares with what other companies are spending -- especially other companies in your industry. Exhibit 1 shows a template for calculating the cost of the planning process; you can modify the template to estimate expenditures on virtually any process. This template's results can be very revealing on their own, but they offer a whole new level of information if they are compared with benchmark data from other companies.
