The Gantry Group

Market Validated ROI Analysis

Gantry Group Newsletter Issue No. 22, October 2003

This email is never sent unsolicited. You are receiving this email because you have subscribed to receive news and updates from us or one of our affiliates. If you don't remember opting in, or you think someone else has opted you in against your wishes, please click UNSUBSCRIBE. Issue Insights: Technology purchases must be aligned with the company's strategy and help contribute or improve the bottom line. Before investing in a particular IT solution, enterprises must validate the solution category. CFOs have reclaimed the gate keeping responsibilities on IT expenditures. In order to sell, make the technical manager your product's champion to the CFO. Arm him/her with quantitative ROI tools to speak the CFO language. New Publications Available! Value Driver ROI Profile Synchronicity Developers Suite is reviewed by Gantry Group. The solution category of semiconductor design collaboration and management software is examined from an ROI value perspective. Value Driver ROI Profile SpotCell In-Building Solutions for Wireless Carriers is the latest in Gantry's series of solution category ROI profiles. Economics of Integration White Paper AppConnect is PeopleSoft's new offering in the "business process management" solution category. CLICK HERE TO DOWNLOAD

Category First; Brand Second Remember when multi-million dollar IT deals were closed in a matter of a few meetings and a slim deck of PowerPoint slides? When having the cutting edge technology was almost enough to get a client to sign on the dotted line? Well, for better or for worse, those days are long gone. Plenty has changed since those carefree, "sign 'em up" times, and one of those things is the way companies buy and sell technology. With practically no non-discretionary spending, enterprises no longer buy technology for technology's sake. As companies become leaner and more strategic in the face of budgetary constraints, economic hardships and market uncertainty, corporate goals and objectives stand behind every business process automation or information management purchase. If the solution in question does not align with the corporate plan, the technology will simply not be acquired. According to a Morgan Stanley study, U.S. companies wasted approximately $130 billion on "unneeded software and other technologies" between 2000 to 2002. Considering this somewhat startling statistic, the cautious approach to technology purchases is not at all surprising. As information technology takes on a more important role in results-driven organizations - across industries - an increasing number of decision-makers are beginning to ask the hard questions. They are seeking and expecting to find a clear connection between today's investment in technology and tomorrow's bottom-line results. Consequently, enterprises have to first validate that the solution category of the technology under consideration supports or accelerates the corporate objectives. Only after completing this step is the company ready to shop for brand within the solution category. This buying behavior has ignited pervasive change to technology vendors' selling strategy. Today, being the category leader is simply not enough for a vendor to grow their customer base. A vendor must persuade the enterprise buyer using quantitative selling tools that prove the strategic impact of their solution on that buyer's organization.

Throughout the tech hype of the 1990's, technology was overwhelmingly viewed as a stepping stone of progress. Inflated IT budgets were spent on "bleeding edge", often unproven solutions, with little regard to their true value and contribution to the performance of the overall enterprise. In fact, IT projects were simply that - IT projects, removed from the strategic logic of the organization, undertaken for their own sake. Today, after the tech bubble has burst, technology is transitioning into a more strategic realm. The expectation is that IT improves the current processes and/or makes new ones possible, creating value across multiple functions. Consequently, technology is a strategic tool utilized to enhance or contribute to the bottom-line. According to a study conducted by CFO Research Services ("CFO Mind Shift: Technology Creates Value", Jan 2002), 6 out of every 10 CFOs view information technology as "absolutely crucial or very important to revenue and profit growth at their companies." The perception of technology has shifted from that of a cost center to one of a value center. With close ties to corporate strategy, only IT that delivers clear bottom-line value to the enterprise is considered to be a competitive advantage.

A good example of the new role of technology and the expectations attached to it - is CRM - the famed (or is it infamous?) Customer Relationship Management solutions. At its inception in the 1980s, CRM gained its greatest momentum and popularity in the mid-to late-1990s on the wings of 1-to-1 Marketing and Personalization. As firms became less product-focused and more customer-oriented, the idea of relationship marketing and management offered endless benefits that spoke directly to companies' bottom-lines. CRM vendors claimed that knowing thy customer (i.e. having up-to-date accurate customer data at your fingertips) and responding to their needs (i.e. employing an automated call center to improve customer service) created customer loyalty, retention and would reflect positively on the revenues of the enterprise. As you can imagine, with promises like these, everybody jumped on the bandwagon. After all, why not? How could one go wrong? It just had to be a slam dunk! According to Gartner research, $23 billion was spent on CRM in 2000 worldwide. Then came the harsh reality. According to a 2002 IDC study, large CRM projects with more than $3.1 million invested produced an immediate increase of 8% in revenues. However, a 2001 Gartner study indicated that 65% of CRM initiatives failed, projected to reach an 80% failure rate by 2003. The market has spent a lot of money on CRM and got practically nothing in return.

Today, organizations are a lot more cautious about CRM. Learning from the mistakes of the past, the solution sector has become very practical; it has redefined itself. In order to keep selling their products, CRM vendors, as well as their potential customers, have established success metrics: hard numbers that speak to the ROI, TCO and payback period of the CRM initiative. The metrics cover both tangible (increased sales due to gaining new customers and customer retention, cost reductions from labor, marketing and sales support) and intangible (time savings, accurate sales forecasts) benefits of CRM implementation. If a CRM investment can be justified both from the financial and tactical view points, it will become a part of the customer-focused strategic direction of the organization. Since companies have become smarter about CRM purchases, the success rate for the solution category has turned around. CRM Magazine research, conducted with CAP Ventures Inc. (February 2003), showed that "nearly 90% of firms that have measured their ROI-based CRM objectives have found their CRM solutions to be meeting their goals, with about 70% responding that their CRM initiatives have exceeded their original expectations."

Based on a recent Gartner survey of IT Spending and Staffing (October 2003), companies plan to increase their IT budgets by some 5% in 2004. After several years of budget cuts, one can be sure that this money will be spent wisely and with caution. Moreover, not only has the selling methodology changed, but purchasing signoff authority has changed as well. In order to maintain tight reigns on corporate spending, CFOs have reinserted themselves into the purchasing approval process at much lower expenditure levels.

The role of the Chief Financial Officer has once again shifted from a strict financial focus, to one with increasing strategic responsibilities. CFOs have not only reclaimed their role as the judge and gatekeeper on all enterprise expenditures, they have also became an integral part of the IT selection team. This team usually consists of the CIO, CFO and the group management interested in the purchase and utilization of the technology under review. According to the Chief Executive magazine article, "The New IT Realities" (June 2003), the general trend is that 'non-technology' officers are "beginning to devote more time and energy to understanding technology that drives their businesses." The CFO Research Services study mentioned earlier also discovered that CFOs spend an average of 16% of their time on technology-related issues.

Technology buys are particularly suspect by the C-suite since enterprises now recognize that the license, subscription or basic device cost are only a fraction of the total cost impact to the organization. Companies are savvy to the contribution of start-up fees, installation, integration, maintenance, upgrades, organizational training, and technical support to the total investment side of the ROI equation. It is therefore no longer sufficient to sell the executive of the group earmarked to be the primary user of the technology. Today's selling approach must also speak to the CFO in explicit quantitative and qualitative business performance and financial metrics that are at the foundation of their decision processes.

What does this mean for technology vendors? It means that the most effective way to appeal to the CFO to "win the close", is to win over the enterprise group manager, who is actually interested in buying and using the given technology  -- thus making him/her the product's champion. To be successful and get the sale, the technology vendor and group manager must partner to prepare the value case for presentation to the CFO. Many technology vendors have found success by winning the group executive support and eliciting their help as an in-house champion to persuade the financial gatekeeper.

Since enterprises are value driven, a technology vendor must show exactly HOW their offering delivers value and WHEN the value will be recognized. With tight budgets, extensive purchase criteria and multitude of available offerings, it is safe to assume that companies shopping for new technology have high expectations. Return must be measurable in both dollars and time.

According to the CFO Research Services study mentioned earlier, 86% of CFOs surveyed "use at least one financial metric to determine information and communication technology project funding." ROI and payback period, a breakeven on the technology investment, turned out to be the most popular: 64% and 63% of CFOs surveyed reported using these metrics, respectively. Depending on the industry, if the payback horizon is greater than twelve months, the enterprise is highly likely to postpone or even forgo the investment.

There are a number of tools that a sales organization can use to communicate a quantitative value proposition to prospects, beginning with the enterprise group manager who would be using the technology:

ROI Value Driver White Paper memorializes the pain points and challenges of the potential technology buyer, documenting how the ROI value drivers of the vendor's offering positively impact their business. Such a white paper reinforces the fact that the solution seller have taken careful consideration to build value into the product with a deep understanding of the buyer's business. An ROI white paper is a good first step since it enforces the discipline of getting a solid foundation of your tangible ROI message first, prior to calculating it. The ROI Value Driver paper is particularly useful for companies who do not have an established customer base or whose customer base does not have a long enough deployment track record with the offering being modeled for ROI.

ROI Calculators have proven to be excellent frameworks for advancing the sales process. While the end goal of the ROI calculator is to reveal a bottom line number, the real value of this tool is establishing a thought process in the prospect's mind about the discrete areas where the solution vendor's product delivers value. Offering a high degree of customization to fit unique products and clients, the ROI Calculator allows the seller to practically discuss how the product will affect the buyer's business.

ROI Benchmark Studies can be used to project a prospect's expected ROI with the solution under review prior to purchasing and deploying the product. By applying the ROI Calculator, a statistically representative set of ROI profiles is developed for companies who have sufficient experience with the deployed solution in question. Aggregated, averaged data for each value driver is then used as default benchmark values within the ROI Calculator, thus transforming the tool into a credible forecasting model. 

ROI Case Studies help prospects learn and vicariously experience value delivery through vendor's existing clients. The participating clients are carefully selected to provide a business situation that resonates with that of the potential buyer. The resulting ROI case study outlines the precise business situation and challenges as well as motivations and the decision process that led to purchasing the product. Moreover, the study uncovers how the offering helped the customer overcome the outlined challenges and details the key realized ROI value drivers

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