It’s probably the most common and most hated question in the technology market today; what’s the return on investment for technology in business? And in defence of those asking the question, some of the answers posted by suppliers of technology have been pretty lame. I’ll never forget when one particularly persistent salesman told me that the ROI of a particular CRM software application was that it was cheaper than one of its competitors. I pointed out that price wasn’t a contributing factor to return on investment.
This kind of hubris doesn’t help anyone. Yes, there may well be a cost which is incurred by a business for failing to adopt a piece of technology. But it needs to be expressed in terms of the value contribution to the business over time, compared with alternatives. Contrary to popular opinion, commercial investment in technologies is not, and should never be, a matter of following fashions. Instead there should be a clear and measurable impact to the business, which can be mapped in prospect. And it needs to be obvious that return is worth the pain of adoption. Because no matter how good any technology may be, companies have a pre-existing investment in their current mode of operation. It’s much easier to keep using current systems than to adopt something new.
So what should be measured and how do you measure it? The metrics first need to be divided by category: direct revenue generation, improvement in operational efficiencies, and intangible (but not unmeasurable) returns for the business.
The first measure of return on investment should be an increase in direct revenue, through increased customers and increasing revenue per customer. This should be easy to calculate in retrospect, but in prospect it has to be measured through the value addition of automated systems when compared with direct staff communication and processing. As a general rule, direct revenue isn’t calculated by staff time saving (that comes under operational efficiencies), but through the direct comparison between number and value of sales from automated systems when compared with human-initiated sales.
Direct revenue can also be measured through the improved sale value of individual customers. In prospect, this means making a calculation on the current versus future potential average value of customers, on the basis of increasing volume of interactions with customers. Unfortunately, there is little evidence to suggest that the number of interactions with customers in necessarily correlated with the number of sales with those customers. Thus such calculations should be treated with caution.
Here’s the thing. Direct revenue is rarely the best means of calculating ROI for a technology investment. Unless you can show an improved volume of transactions through a self-service system when compared with assisted sales, it’s unlikely that the direct revenue from automation is going to be a compelling reason for technology investment. Product marketers who talk about direct revenue improvements are either expecting the staff to work harder and longer with the tools to generate income (thus sneakily introducing an operational efficiency component) or they are making assumptions about total revenue return without any basis in reality.
This is the big one, and the one which is most often poorly measured. Historically, we have measured improved productivity through savings in operational costs and through customer retention rates. This is still a good idea, but it shouldn’t be the only measure of operational efficiency. As Forrester have noted, operational efficiency needs to be measured in terms of reduced probability of bad business outcomes, and increased probability of good business outcomes. Technology which acts as a data prediction facility, or which better serves the needs of customers through provision of timely, responsive information, can be measured as having a multiplier effect on productivity. Reduced churn rate on customer interactions is perhaps the best measure of operational efficiency. After all, it’s not more interactions that are necessarily needed, but the right ones.
In prospect, operational efficiencies should therefore be measured in terms of improved volume and cycle times for customer interactions, and reduced customer churn.
And we should not forget the value of reduced operational costs. Technology which enables greater working flexibility (in terms of office hours and staff presence) should reduce office energy costs, fit-out costs, and even insurance costs. And if technology enables the reduction of staff numbers - or the re-skilling of staff into different roles - then it should be included in any operational efficiency calculation. When calculating tech ROI for operating efficiency then, the cost per head in the office should be directly compared with the cost per head for a reduced staff presence. This should be easy to calculate in prospect, as the function of any technology will determine the number of hours of physical office time that can be saved.
This is difficult territory. But just because it is difficult to measure ROI of improved perception doesn’t mean that the exercise is not worth pursuing. Intangible returns are not just a matter of improved brand awareness, brand perception and intention to purchase, but also in terms of the impact of failing to adopt any technology solution.
Brand appeal is measured through the usual metrics of surveys and focus groups, and also now through brand mentions and sentiment analysis of social media conversations, as well as referrals in digitally-mediated conversations.
However, calculation of the failure to adopt a technology solution needs to be considered in terms of opportunity costs. Sticking with your current technology infrastructure will mean you have no capital investment in new technology, no staff training and no potential HR fallout from a reduced headcount in the office. But it will also mean you have no improvements in sales cycles directly attributable to automation processes, and no improvement in business decisions. And perhaps most important of all, there may be a gradual reduction in customer perception of your brand as a result of failure to upgrade. For goods and services where there is little market competition, this decline in customer perception of a brand may be slow, but in highly competitive environments, opportunity costs for failing to adopt technologies in business can be deadly. As customer expectations rise, businesses that fail to adapt to these expectations are quickly dumped in favour of competitors in the marketplace. And that trend can be magnified over time.
Opportunity costs then, may be small in the short term, but rise quickly, and outweigh any ROI in terms of direct revenue and operational efficiency within an extended period. It’s probably the most significant and least measured aspect of technology investment return.
So when calculating technology ROI it’s important to consider more than mere sales or brand awareness for any investment. Metrics are available and they are reliable. And over time, the return can be as simple as staying in business.
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Joanne Jacobs is an award-winning digital strategist and company director. She advises firms on executive management skills, digital change management and social data analysis. She is on the Board of Code Club Australia, and she is a Director of word of mouth marketing firm, 1000heads, where she formerly served as Chief Operating Officer. Joanne has previously worked in London where she ran a social media production house, and she was a consultant in social networking technologies, and was a professional speaker, business coach, trainer and strategist for digital marketing practices. Joanne has a long history in academia, lecturing extensively in strategic use of information technology and strategic internet marketing. She was co-editor with Axel Bruns of the book, Uses of Blogs (2006).