Seal the Deal with ROI
Proving that your solution will quickly pay for itself is crucial to landing more business. Here's how to come up with return-on-investment calculations that will help you gain customer trust and build lasting relationships.
- By Doug Barney
- November 01, 2005
A decade ago, a few hot new features and a little small talk about competitive advantage was often all it took to close a deal. Today, it's not so simple: Customers want proof that money spent equals a payoff down the line—and not too far down the line at that.
It's not just that budgets are tight—which they are. The
market has matured and IT decision-making is now far more refined. If you can't build a credible economic justification, the deal will never go through.
"In the sales world, we are back to the days of having to provide justification for all purchases. That used to be just for Fortune 500 customers; now it is for all customers. And justifying to C-level IT or a top executive can be tough," explains Ryan Thomas, vice president of worldwide sales for ScriptLogic Corp., a software company headquartered in Boca Raton, Fla.
That means you need to add another competency to your
arsenal of technical skills. Master the details of building a
fundamental business case and then back it up with a detailed and credible ROI analysis.
"I've used ROI as a selling point in almost all of our sales, simply pointing out to the customer the benefits they will reap," says Emilio Ordonez, president and CIO of the HP reseller SysCom Inc. in Boise, Idaho. "By showing the customer the differences in time saved by using newer technology or equipment, they realize that their employees will better utilize their time by reducing tasks associated with normal and unexpected job requirements day to day."
It's tempting to take charge of this process and simply hand the customer all your facts and figures and hope he signs. This can certainly work, and can be effective for a one-off sale, but it's not the best way to build a long-term relationship based on trust.
Instead, bring customers fully into the ROI process and give them ultimate ownership. That will result in an ROI analysis that's far closer to reality—bringing you more credibility.
"We have an ROI model and engagement process that is very much based on hard costs and using the customers' own numbers, and we've been quite successful in using it to close deals," says Marc Mangus, director, solutions development for Stamford, Conn.-based Citrix integrator MTM Technologies Inc.
MTM interviews key employees at the customer site to populate its model. "Typically, there are a few rounds of iteration. Often, customers take our analysis and subject it to further scrutiny, either with their own staff, or they have an outside audit firm scrutinize it," Mangus says, noting some of the deals involve millions of dollars in software licenses, plus hardware.
MTM also tracks ROI after the technology is installed. "We track our entire project against [the ROI model] and give regular updates as to where we are in meeting it. Post-implementation, we go back and compare forecasts to actuals periodically," he says.
Case Studies and Calculators
Once you know there's a case to be made, research the general value proposition of the technology. For Exchange Server 2003, for example, you'll find a wealth of case studies on the Microsoft Web site, as well as from analyst firms such as Nucleus Research. In the case of Exchange, Nucleus recently posted a study of Lifetime Products Inc., a Clearfield, Utah, company that makes basketball hoops and stands. Lifetime realized an ROI of a staggering 1,387 percent and a payback of just one month. Companies like Nucleus have dozens of such cases studies covering loads of Microsoft and key third-party products.
When looking through ROI case studies, don't just pick the one with the quickest payback—choose those that best match the client's environment. Be honest if the study shows returns in areas the client won't likely see. Also look for areas where the client might see more return, and talk up those as well.
Lots of spreadsheet models and templates are available from Microsoft, Nucleus and others to help create a detailed and defendable ROI analysis. Just be aware that IT tends to be doubtful—and sometimes hostile—toward pre-built, vendor-created ROI reports and instant ROI calculators. In fact, a survey by Enterprise Management Associates (EMA), a research and consulting firm in Boulder, Colo., showed that 79 percent of IT respondents didn't trust vendor ROI calculators, and that 100 percent of executive-level IT respondents didn't trust them.
"Upper management still wants to see the financial justifica-tion for a project. They want to see ‘internally generated' ROI from their own staff members," says Sean Schantz, vice president of sales and business development for Imanami
Corp. in Livermore, Calif. "The staff members, usually the technical types that really want to implement the new
hardware/software solutions, are on the hook to provide ROI. The vendor needs to help those staff members and point out how to generate ROI. So sometimes the ROI tool provided by the vendor's marketing group is a great starting point for the customer to generate an ROI."
The most powerful ROI tools come from third parties, he says, because they add credibility. Glomark Corp., for instance, sells tools that justify what it calls Economic Value Creation, and sells them to sales organizations. One customer, IDX Systems Corp., claims a 100 percent close rate using the tools. Alinean Inc. claims that its ROI sales tools, 12 years in the making, shrink sales cycles by 30 percent to 40 percent. If your budget is large enough, and the deal big enough, many of the big research houses are also willing to lend a hand.
EMA suggests that partners go beyond the ROI calculators and intelligently lay out the fundamental value proposition and where the returns come from. Then, they should tailor that discussion to the customer's environment.
How ScriptLogic Does It
| Network automation software vendor ScriptLogic spends a lot of time working with partners on ROI. Maybe it's because ROI is an effective way to sell product. Or maybe it's because Ryan Thomas, vice president of worldwide sales for ScriptLogic, has a solid ROI background from his years at Gartner Inc.
Fundamental to the company's approach is credibility. "It is tough to provide a credible set of ROI tools that build confidence at the end-user level," Thomas says. "A lot of vendors build tools that are biased and make the vendor look good."
ROI starts with a technical analysis. In ScriptLogic's case, the company finds out how much time IT pros spend building an Active Directory policy without using the ScriptLogic tool, and then how much less with it.
"We have case studies [that demonstrate] use of the ROI tool to resolve customer issues, covering things as simple as, ‘How much time is spent on help desk? How does Desktop Authority change that by removing mundane tasks?' You can correlate dollars saved and dollars gained to use of the product," Thomas says.
Partners can use a number of these case studies to help make their case. A profile of Children's Healthcare of Atlanta, for example, shows that the ScriptLogic 3.02 network admin tool reduced support intervention by 30 percent.
But the real value comes from moving beyond case studies to custom partner-driven analysis. "We teach the basics to the partner, and then they move on to using the ROI tool. They have to clearly understand the value proposition of our product," Thomas explains.
Training is not optional. "ScriptLogic has a series of mandatory webcasts for partners, and a monthly webcast that tackles a lot of the ROI and business justification issues," Thomas points out.
"And we work with partners on a case-by-case basis teaching the tool."Once trained, partners drive the ROI analysis process. "Most of the partners have an intimate knowledge of the customer—they can provide all the data points we require," he says, which amounts to 14 fields.
While it's tempting to build a model with the quickest payback, fudging the numbers can ruin credibility—forever. "We urge partners to build a bridge of confidence with the customer, so they see it's not vendor-biased," Thomas says. "The ROI analysis has to be 100 percent accurate."
And being honest makes follow-on sales that much easier. "You want to maintain the relationship with the customer, and do it with integrity, so when a new product comes down the pike, the partner can go back and build upon that confidence with the customer."
The benefits of the program are already apparent. "We have partners that can speak as well or better about ROI than our own sales organization. They can reach more customers and close more deals. They also close sales faster, follow-on sales are easier, and customer satisfaction is increased."
The ScriptLogic model is relatively conservative and is based only on direct benefits, which can underestimate the actual ROI. "Indirect benefits are based on assumptions. You have to be careful with how much indirect data you introduce and how fast."
The ScriptLogic Web site isn't exactly packed with ROI calculators. Instead, the company works one on one with suppliers and only wants trained partners to do this kind of analysis. "If you put ROI tools out there for the masses, untrained people can take them to the customer and it becomes a big mess. I could pull up five Web sites right now and get an ROI calculator, but they aren't backed up with education and interpretation training."
He's right. Googling "ROI calculator" returns more than 1.5 million results.
— Doug Barney
Building a Model
Each customer is different, so you'll have to build each business case from scratch. That means changing whatever template or model you use to include all the criteria and assumptions that match the customer and gathering all relevant data. Don't force fit every situation into the same
Before writing your first macro, gain a fundamental understanding of the economics of the product you're trying to sell. What is the value proposition? Does it make IT or end users more productive? If so, how much more productive—what is the value of that time?
Products such as management or scripting/automation tools are designed simply to enhance IT productivity. This may be one of the easiest sales because IT understands its own workloads and salary structures. For other, general purpose products such as Exchange Server 2003, the aforementioned ROI overviews can help set the stage.
Some ROI models are pre-crafted and even hard-coded. For instance, Forrester Research Inc. has a detailed workbook to cost-justify Software Assurance. Nucleus Research has a series of tutorials to help build ROI models. And companies like Alinean consult, train and build ROI models.
However you derive it, your initial ROI model is really the beginning of a long conversation about how the product will actually be used and its realistic impact.
One ROI report worth studying is "Windows Small Business Server (SBS) 2003: Out-of-the-Box ROI for Small Business," published by Microsoft. Conducted in conjunction with 17 partners, it is based on a detailed survey of 25 SBS customers.
The findings point to an average ROI of 947 percent, with one company achieving a 2,000 percent return. The payback for the majority of customers? Less than a month. If these types of findings can't get your foot in the door, you're probably in the wrong line of work.
Let's say you can prove this IT tool can pay for itself in six months by calculating hours of work saved times average hourly rate, including benefits. Sounds compelling, but what is the actual impact? Could this product replace a full-time administrator, and if so, would your client actually lay off someone? Given this is delicate ground, let the IT manager reach that conclusion so you don't come off as hard-hearted.
Perhaps the tool will save less than the equivalent of one full-time employee, or a few hours per week for an array of IT staffers. Will these workers use the time for other productive labor; if so, can that be quantified and proven?
You may have some suggestions as to how IT can use this time, but it's more effective to ask the managers (both IT and business line managers) what they would do if their team had more time and could be reassigned. You may be surprised at the answer—and it may open up an opportunity to sell a new application, upgrade or migration. Or it may turn out that the managers don't have a good idea of what their staffers would do with newfound free time, thus reducing the potential ROI.
Building a long-term relationship requires you to inject this kind of realism, realistically analyzing how much the client will exploit possible benefits. If your model calls for productivity gains from a new feature, make sure there's a plan in place to properly install and configure the feature, and schedule training so the feature actually gets used.
Tools of the Trade
Many software vendors have tools to help end users and partners cost-justify their products. Quest Software Inc., for example, has a tool that quantifies the ROI of a move from Windows NT to Windows 2000 Server, factoring in the benefits of server consolidation.
It costs $435 per user per year to support a server that can
handle 75 users but only $270 per user per year when the server can handle 250 users, according to research firm Gartner Inc. The Quest ROI tool uses this data as part of its model.
The ISV Winternals Software
has a similar approach. Its products help keep systems available, and as such, the ROI template looks at the average cost of IT administrators and the cost of downtime, and then factors in the average number of failures. This template is customized by the partner, who fills in stats about the customer environment and builds a custom ROI document. The partner, rather than the customer directly, provides the information.
3i Infotech Inc. works both sides of the ROI fence. As a
consultancy, it works directly with customers and builds ROI cases to justify the business. But the company also has an array of products that are sold through partners.
"In the products case, we definitely help partners establish the ROI, and there is a formal process of partner enablement and training," says Ramesh Narayanaswamy, vice president at 3i Infotech in Edison, N.J.
— Doug Barney
Many in IT, anxious to start on a pet project, rush through an ROI analysis. And many partners, with quotas to fill and sales to make, are also in a hurry. But ROI calculations often end up in a document, proposal or presentation that can be used against you later. It pays to take your time.
The data—all the data—is the key. Look at all the costs, as well as all the benefits. Obvious costs include the software (including possible OS upgrades and new versions of third-party tools such as anti-virus), and any additional hardware, maintenance and IT hours involved in the installation. Softer or less obvious costs are the ones that can really bite, and you don't want to be blamed for sweeping them under the carpet:
- Is there a need for consulting, perhaps your time billed hourly?
- What about training IT and end users?
- Will there be any downtime during the cutover to the new tool?
Direct benefits focus on time savings, staffing reductions and other clear productivity gains. Indirect benefits often can't be precisely measured but tend to focus on softer productivity gains, such as better communication and enhanced usability. Be honest about indirect benefits, but don't undersell them either—often indirect benefits account for the lion's share of ROI.
If you believe your ROI analysis is truly accurate, and you've got the resources to back up your assumptions, consider offering an ROI service level agreement (SLA). The SLA means if the ROI goals are not met, you will give the customer something in return, such as extended service or additional licenses.
A key ROI element is timing. If you
project a one-year payback, you need
to know that the tool will be installed
in time and the features quickly and
Finally, don't fixate on a number,
but discuss a range of ROI possibilities with the client, from worst case to best, and what factors would promote or reduce payback.
Your ROI analysis should be as complicated as the variables dictate, but you'll need to make the final results easy to understand. IT sometimes views things that are complex for the sake of being complex as just so much hot air, and if you are presenting to the CIO or business line executives, they'll want it simple and clear.
Some vendors and partners paint every ROI picture so it's rosy. It's better to be conservative, or at least realistic, when
estimating savings or benefits.
Microsoft has a fundamental framework called Rapid Economic Justification (REJ) that partners may find valuable. The REJ framework is a broad approach to assessing the overall business value of IT. It calls for a team of internal business leaders to define
the firm's critical success factors (CSFs), another term for goals, and how they will be measured, which is in the form of key
performance indicators (KPIs).
KPIs are items you can measure that are specific to each organization. They include quantifiable measures, or metrics, such as sale productivity, inventory, lead times, revenue growth or whatever you deem important and can tie to a technology investment.
Once in place, technology that best addresses the success factors can be chosen, and the potential benefits studied through cost/benefit analyses, a look at risks and a more detailed ROI-centric analysis of metrics such as payback period, TCO and internal rate of return (IRR). (IRR is the return you could expect to receive if, instead of spending money, you invested the same amount in the company.)
With the help of third parties, Microsoft has built an array of REJ case studies and models. Courses are also available that teach the framework, from companies such as the online training firm SEEK Learning (formerly Selfcert), based in Sydney, Australia.
Many shops lack true ROI expertise, a situation partners have been known to use to their advantage. It's fine to exploit this weakness, but only if you serve as an ROI mentor, and help train the client so they know the facts and figures as well as you do. This strategic connection will last for deals to come.
Start by pushing the company into building an ROI team that includes IT, the essential business line executives and company financial experts. Ultimately, this business case may make it to the CIO and often the CFO. Customer participation reduces the skepticism and questioning immeasurably. And if the ROI doesn't live up to expectations, it has more to do with their analysis than you over-promising.
Assessing the Numbers
Once you complete your ROI analysis, if you find the numbers don't come close to a reasonable ROI, it probably makes sense to bail: You won't likely be able to lower costs enough to make it work.
But if they are close, there's a lot you can tweak to make the case compelling. Costs are key; feel free to toy with the costs within reason, as in making cuts that can actually be made. Those costs include:
- Software (including extras)
- IT time
- Any consulting services provided
Resist the temptation to manipulate the numbers just to spit out a more attractive result, but sometimes, you can change the scope of the project. If a large rollout doesn't make economic sense, are there smaller, discrete groups that would benefit more? Can you make a more effective proposal for installing the product just for these groups?
It may be possible to change the financing, such as spreading payments, but this won't fix fundamental flaws in an ROI model.
Create a Track Record
Selling a product based on its ROI and failing to track the actual results is like buying a lottery ticket and never checking the numbers—you never know whether or not you won.
If ROI is falling below expectations, you may be able to find creative ways to help boost returns, whether through training, reconfiguration or additional technology. In any case, tracking ROI results will help you build more accurate models in the future.
It'll also help you build a relationship of trust with your customers—part of what will make you a true strategic partner.