Return on Investment (RoI) modelling is a simple yet powerful concept that is very useful for comparing the value of different approaches to a project or other activities. As a result it is also a very useful selling tool as it enables a sales person to help a prospective customer understand the value of what is being offered compared to; a competitive solution, the option of the customer doing it themselves, or doing nothing at all.
For some, RoI is a tool that can only be applied to products but it is potentially even more useful when comparing service or solution alternatives. Your prospective client will have resources dedicated to delivering what you are proposing to provide and they will be using whole resources. Consider an IT installation, they will require; people, hardware, software, an equipment room, air conditioning and office space. All of those resources are dedicated 100% of the time to the IT function whereas a service provider will be able to time share resources so the client will only pay for what they use rather than what they own.
Another benefit of using RoI in a service or solution environment comes from its ability to help make the intangible tangible; it forces people to appreciate the true cost of what they are currently doing rather than just seeing the direct costs.
While most people accept that RoI is a simple concept many find it hard to apply and as the character in the cartoon suggests the most common problem is finding available data to populate a RoI model.
I do not think the data is a big issue and having found this to be such a powerful and useful selling aid I would like to share some ideas and tips as to how you might overcome the data issue enabling you to apply RoI when selling your propositions.
Total Cost of Acquisition (TCA) – the total amount you have to spend to complete a purchase and become the owner. For example; when buying a car there will be an advertised price but to acquire the car you actually want will have to spend additional money over and above the price e.g. optional extras, insurance, road tax, delivery charges, etc.
Total Cost of Ownership (TCO) – the total outlay to own and use what you have bought. Continuing with the car analogy, in addition to the TCA, the TCO will include; maintenance and repairs, roadside recovery service, fuel, renewal of insurance and road tax, interest if you buy on a loan and, the big one, depreciation. You may even have to include the cost to garage the vehicle, or purchase a resident’s parking permit.
Price Cost Value (PCV) – simplistically, the price is the TCA, the cost is the TCO and the value is the difference between what the purchase costs and what you gain from making the purchase. If owning a car means your commute to work will take less than an hour whereas you now spend close to two hours with several changes on public transport the value in the purchase is the convenience and comfort of travelling in your new car along with the additional hours of free time.
If you present a RoI case, to support something you are trying to sell, you must take account of TCO and PCV as basing it simply on TCA will produce a misleading result that understates the position which in turn damages the credibility of the claims you make to support your proposed solution.
This is a timely point to remind ourselves that decision making is not just a simple clinical calculation and it will involve subjective and emotional as well as objective assessment criteria. RoI mainly focuses on the objective evaluation but to gain best value you need the prospective client to trust you so you will need to pay attention to the emotional and subjective factors as well.
All too often prospects use “you are too expensive” without fully appreciating what they are currently spending. What RoI achieves for you is to create a clinical comparison between current and potential future cost.
What is so hard about RoI?
A practical way to answer this question is to refer to a recent conversation that I had with a customer who provides a range of hosted IT solutions hence often finds themselves in the position of needing to justify their proposed costs, compared to the costs of a competitor’s solution or to the client doing their own hosting. The key point that came out in the conversation is that most potential clients omit certain significant but disguised items when providing current IT costs which leads to an unfavourable comparison with our customer’s proposed solution. This is the nub of the matter; for RoI to function properly as a comparison tool, the data types used must be the same or equivalent in all cases. A simple illustration of how this might manifest itself is:
Provision of an IT service requires; hardware, software, security, air conditioning, people and floor space. There are many other smaller items but these are the main building blocks. I will use the people element as an example to illustrate the importance of like for like information being used for a RoI comparison. The TCA calculation of employing a person must consider the costs of; recruitment, induction, training, salary, NI, variable compensation (including emergency overtime), sick pay, pension and management, facilities & HR overhead. However, it is common for a client considering moving to an externally hosted solution to consider just some of the cost elements of employing their own IT staff and typically just; salary, NI and other direct costs such as sick pay and pension. However, the other cost elements are a factor and they will no longer be there if the decision is taken to outsource the hosting of IT so must be included in the comparative evaluation.
Using such a limited data set will generally tend to make the external solution look relatively expensive. While this is not good for a potential supplier it is even more serious for the client as it means they do not have a real grasp of their actual IT costs.
So, the dilemma is; if potential clients do not have a complete picture of their current costs, or they disregard some items that should legitimately be included, how can a fair comparison to be drawn with an outsourced solution?
How can you address this dilemma?
One successful mechanism is by building a RoI model that incorporates all of the cost elements relevant to a particular proposition or business sector and offering this to the prospective client for them to use with their own figures. The key steps are:
- Build the model around the particular proposition; the information from a generic model will never be as believable as that from a specific one. So, for example, in the case of a hosted IT service the model will include a people element and this must include all the employment costs not just the direct ones.
- Once developed present a blank copy of the model to the prospective client. Ask them to populate it using their own figures. If the client says they do not have some of the figures provide them with industry norms using well recognised and respected sources – agree this in advance.
- Ask the prospective client to share their findings with you and compare their result with your quotation for providing the service. If you have established a good working relationship with the prospective client there should be no problem with them agreeing to this. If they do not wish to share then simply ask them how their figures compare with your quotation.
Things to bear in mind when considering a RoI approach:
- Decision making involves a mix of quantitative, qualitative and emotional factors so depending purely on RoI is unlikely to work.
- At the beginning of the engagement with a new prospect undertake a process of discovery where you can explore everything that the prospect will consider when making a decision.
- Your RoI model needs to cover all of the direct and indirect cost elements that the prospective client is already meeting. As you are providing an alternative solution you are fully aware of all the components of cost so it is easy for you to build the cost model.
- If the prospective client is unable to populate some areas of the model you can help by providing norms from respected industry bodies.
- Your prospective client may not accept some of the cost elements that you will want to include so you need to gain their agreement as to what will be included before you present the model and if the relationship allows
- develop the model collaboratively
- populate the model collaboratively
- evaluate the findings together
- RoI mainly looks at cost and having created a genuine comparison between current and proposed costs you now need to move to the evaluation of value as this is what will justify a higher price if that is what the RoI model has suggested. Even if the cost of your proposition is lower you need to focus on the value you will deliver to satisfy the emotional component of the client’s decision making process.
Consider as an example of value; your discovery process established the client is keen to improve the service it provides to its customers. They are much more likely to decide in your favour if you have demonstrated that your solution will deliver the required improvement in customer service. Even if the RoI model showed your solution as being more expensive the value of improved customer service that your solution will deliver is still likely to win the day for you.
Even if they do decide to stay with their current solution, they now have a clearer view of their real costs. Be aware – rarely is no a “no never” it is most likely a “no not now” so you should re-visit them at some point when you may well find yourself pushing against an open door. They will have had time to reflect on what they learnt from engaging with you and the idea of change may seem less scary with the benefit of hindsight. They may also have recognised the value you added through your approach which is likely to make them feel you will be a good partner that they can rely upon.
A common question is – when should you re-visit a prospect that has said no? When the time is right! You will know the right time if you have asked the right questions during your discovery process. The right time will be; when an existing supplier contract is due to expire, or when they are formulating the next annual budget, or when they are opening that new branch office. When you return, focus on what you discovered that will matter to them and they will appreciate the fact that you have empathised with their position.