“We need to do an ROI analysis.” I have either heard or said that phrase thousands of times throughout my career. I have performed hundreds of them — some extremely complex, some not as detailed, and even one on a Post-It note. It is likely you’ve had similar experiences. Return on investment analysis has become a key component of decision-making in business, mathematically confirming that the proposal is a good idea.
But it’s not just in business that ROI is used. As rational humans, we frequently look to justify some of the most important things in our life. We evaluate colleges and look at the starting salaries of graduates compared to the cost of attending. We do quick math to figure whether the tax deduction on mortgage loan interest will make buying a home cheaper than renting. I even had a co-worker tell me that the engagement ring he bought had gone up in value so it was a good investment (he had to be reminded that if he was put in a position to cash in on that gain, something else in his life had gone terribly wrong). More often than we realize, we use the principles of ROI as a logical justification to spending money.
So how do you perform a ROI for purchasing software?
Today’s business software tools usually aim to deliver some combination of the following benefits:
• Productivity- Automate the flow of a business process so that it takes less time to do it
• Centralization- Enable access to various information sources from one common point
• Visibility- Combine data sets to identify magnitude, trends, or cause-effect relationships
In deciding whether to buy the software, someone will inevitably ask for validation that the benefits are greater than the tool’s cost. But accurately predicting the future benefits of productivity, centralization, and visibility is most likely guesswork. And it is at that point where we begin making assumptions: This process currently takes 4 people 10 hours each; the tool will reduce that to taking 2 people 5 hours. Lack of visibility has meant our success rate is 20%; the visibility features in the tool will increase our success rate to 40%. And if the math still doesn’t pencil out, many times we just change the assumptions. And therein lies the danger of this approach- we focus on making the assumptions work rather than asking some very important questions.
Over-reliance on ROI analysis can create a false sense of security going into the purchase and unfulfilled expectations after the purchase.