Can You Collect on ROI?

 
 
By eweek  |  Posted 2001-05-21 Email Print this article Print
 
 
 
 
 
 
 

A Guaranteed Return Is No Assurance That You'll Get Paid in Full.

Return on investment is rapidly becoming a prerequisite to selling into midsize and large corporations, making the up-front preparation far more time-consuming and making it dramatically more difficult to get paid in full once the project is completed.

While the process of selling a solution still takes about the same amount of time—from proposal to acceptance— the burden of selling a solution is shifting almost entirely to the consultant and integrator.

Instead of relying on C-level executives to champion a proposal to internal management, the outside partner now has to build in a detailed cost analysis that minimizes any internal resistance. Typically, that means an exponential increase in up-front preparation. Instead of just designing a solution, you also have to build the equivalent of a request for proposal, or RFP, which is a time-consuming process that requires an intimate understanding of your customers business.

Still, if corporations do buy into the ROI gains, theres no assurance youll get paid the agreed-upon amount. Many ROI-based contracts are being written based on performance. Even if you meet the letter of the contract, the customer can still balk. At that point, you can either sue and jeopardize the customer relationship, or eat the difference.

"If its a tier-one client and they resist a payout, youre left with a catch- 22," says Frank Settle, VP of integrated engagement leadership at Sapient. "If you push it, you walk away with your share of the upside, but you also have a weakened customer relationship."

The Cost Equation Building an ROI model for customers isnt a new concept. Big Five consultancies have been doing it for the better part of a decade—when customers ask for it. But since the mid-90s, when enterprise applications turned companies like PeopleSoft, SAP and Siebel into Wall Street darlings, ROI generally has taken a back seat to simply getting the job done.

The honeymoon with enterprise applications is now over. New enterprise apps are starting to hit the market with built-in ROI tools. Allegis, for example, which makes partner relationship management software, has an extensive ROI tool that it uses for every customer engagement. In addition, the company has an outside auditor check its results so that it can prove its concept to customers.

"We have enough customer success and repeatable deployments now to show this," says Mark Morrissey, VP of business development at Allegis. He adds that the company also is doing ROI training for its partners to use its tools.

One of the recipients of that training is PricewaterhouseCoopers, which is looking into taking Allegis tool and modifying it for the customer relationship management market.

"If you can make an ROI case, its an easier sell," says Gary Ryan, principal consultant at PwC. "Consultancies like us have to go in and make a business case. In one instance, we had to come up with metrics. Not having ROI metrics hurt us. The project is still in debate."

Still, automated tools dont work in every case. In less-defined situations, building an ROI equation requires a very keen understanding of the customers business and some good estimates of how technology will affect a companys bottom line. And in some cases, making those ties can be a real stretch.

"Theres a lot of stuff were working with thats harder and harder to see as tangible," says Tim Radtke, president of integrator TSR Solutions. "How do you put a price on a wireless backbone?"

Radtke says that two approaches are developing for the ROI model. The first is consultative, in which the integrator develops an RFP that an end user actually may have other companies bid on, as well as the company that develops the RFP. The second is a quick-hit approach, in which the integrator develops a quick table for such things as alternatives to dial-up or DSL, then runs it through a basic spreadsheet.

Scott Silk, Senior VP of marketing and business development at ePresence, an infrastructure integration firm, encourages his salespeople to stick with the basics. "If you make your salespeople use some type of ROI calculator, you know what they are going to do with it," says Silk, who arms his troops with hard copies of plain, easy-to-read and easily understandable case studies.

The case study, of course, may be a customer project that is similar to one where ePresence is making a sales pitch. "We use case studies that show the business problem, the solution and what the business benefit was," Silk says. The case study is usually three or four pages with details and sometimes dollar figures on what the customer saved because of the specific implementation.

The Risk No matter how you sell it, ROI also opens the door to major challenges on paying for a project. The reason: It puts in the customers hands a timetable for completing a project and the actual savings that are supposed to result. Quite often, the savings arent that clearly defined because many other factors can enter into the project.

"A lot of this is art rather than science," according to Sapients Settle. "What Sapient is encountering right now are operational difficulties that stem from things like the deregulation of power. Were looking for a business case because CFOs and CIOs are pushing back harder. They want to know why they need something and when it will be done. In major oil companies, for example, the biggest investment is managements time. The money to build the right system is only part of the puzzle. They have to put their best and brightest on this."

Settle says its difficult to build an ROI that includes the cost of a general manager who has to spend a half day every week learning a new system. Its also difficult to determine how a solutions benefit will suffer if a competitor opens a new plant down the road.

Ray Lane, general partner at Kleiner Perkins Caufield & Byers and former COO of Oracle, says the whole IT industry is in transition—a factor that makes any ROI equation more complicated than ever before. He says technology and business processes are changing at the same rate for the first time, fueled by changes in supply chains and a shift toward collaborative software.

"The fastest-moving companies will use the downturn to reposition and start thinking about how to get real gross margin dollars and not just revenue growth—an extraordinarily different mind-set from the quarter system," says Lane. "Innovators always have an advantage."

But building an ROI equation around innovation is next to impossible. Compounding this problem is an increased emphasis on performance-based contracts, which require you to prove that you delivered on your promises.

"The biggest difficulty for us is establishing a baseline and cause-and-effect scenario from IT," says Settle. "Clients are buying much more deliberately than in the past and integrators need a much deeper understanding of a customers business. To do value-based fees, you have to be much more sophisticated about running your business and basically manage a portfolio of upside IT investments."

Settle notes that proving performance probably will open a whole new liability practice in the future, in which accounting firms will come in and measure ROI from projects.

Whats Working No matter what the problems, most integrators and consultants believe ROI is here to stay. As a result, many say they are refining their processes and looking for new tools to simplify it.

"We went through a downturnin the fall of 1998; we used ROI back then, and we have now developed a better ROI process," says Raul Fernandez, CEO of Proxicom. "What is happening with the client in the Fortune and Global 500 is that they are making priority decisions based on quantification," he suggests.

To answer clients pressing question on how they can save money in a transaction process or how much money can be saved with the implementation of a certain solution, Proxicom is now using a refined and in-depth ROI process for customers during a sales pitch, Fernandez says.

"For our part of the sales process, we are helping our clients to make sure they are capturing value potential, cost savings or additional transaction flow through the initiative that is being envisioned," he says. And since Proxicom is focused on seven vertical markets, that means ROI for manufacturing will be different from ROI for the communications industry.

The big question is, which approach works best for getting paid on time?

Deborah Gage contributed to this story.

 
 
 
 
 
 
 
 
 
 
 

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