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Alan Pelz-Sharpe

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ROI calculations are a joke

8-Feb-2010

Tags: Component Content Management, Digital and Media Asset Management, Document Management (ECM), E-mail Archiving and Management, Enterprise Collaboration & Social Software, Enterprise Search, Evaluating SharePoint, Portals and Content Integration, Web Analytics, Web Content Management

Our colleagues over at Forrester recently undertook some interesting research regarding content management investment attitudes in 2010 (DM, RM and WCM).  The overall finding was along the lines one might expect, "72% of respondents intend to expand their use of ECM technologies"... but there was an intriguing second key conclusion in the report: "49% could not estimate the ROI for any of their ECM systems."

Let me state my take on ROI calculations as clearly as I can. ROI calculations for information technology are junk calculations, a fraud, a nonsense, and a complete waste of time. Clear enough for you? Oh and by the way, ROI calculations from software vendors are even worse...

ROI assessments are based on the simplistic formula of benefits minus costs to calculate the return on your investment. But simple is not always smart, and most if not all the of the benefits in such calculations are by nature predictive. In other words they are guesses, and in my experience, almost always overly optimistic -- and fatuous guesses at that.

There is a cost to any new system, and there is also always a return (sometimes a good one, sometimes bad, often a bit of both) from the system. Far better and more honest I believe to just build a valid business case that details these costs and potential returns, and utilize more concrete and verifiable calculations such as TCO (Total Cost of Ownership) or CDB (Cost of Doing Business). That way you have a business case that details the investment and what you hope and expect to achieve as a result, and at least have a business case based on facts. One that when it strays into the predictive (as it must at times) is clear about its limitations and values.

The industry analyst guru's guru, Paul Strassman, has written extensively on this topic. For those who want to know more about the pointlessness of ROI calculations, I highly recommend you read Paul's bestselling book, "The Squandered Computer", a work that IMHO should be on the required reading list for any IT or Business related degree course.

But to return to the Forrester research findings, I would respectfully argue that they asked the wrong question.  For rather than asking buyers of content technologies whether they can build a valid ROI for new investments, they could have been asked whether they believed new investments in content technology would deliver worthwhile benefits. The results from that would have been very interesting indeed, and I suspect quite different from the question that was asked.

Just like writing an RFP, developing a solid business case can be detailed and tricky work - and it is work that we help our advisory clients with on a daily basis. But in essence it is the core purpose of our work: we help buyers make the right and best technology investments possible. Yet over the years I have seen so many nonsensical ROI calculations, so many works of fiction claiming to be business cases, and so many buyers misled by farcical ROI calculations, that the very sight of those three letters is enough to make my blood boil...