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Can vendor ROI analyses be trusted?

We often don't have time to do our own ROI analyses so we rely a lot on vendors to help. Can vendor ROI analyses be trusted?

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The simple answer is yes and no. Just like a reporter putting together a news story, your reliance on vendor ROI analyses depends on having a credible source and questioning/validating the facts. You should not accept just any solution provider's ROI as gospel; however, working with a good solution provider in partnership and using their ROI analysis can help the team reduce the time it takes to gather an understanding of the opportunities, the potential benefits and the costs.

Here are a couple of guidelines to making sure the ROI collaboration is successful:

  1. The analysis should use a standard methodology for calculating ROI, one that matches recognized accounting principals and financial facts -- better yet one developed by a credible third party and not the solution provider themselves.

  2. The analysis needs to be completely personalized with your own current spending and performance metrics, such as what your particular current costs are, current practices and opportunities for improvement. Using industry estimates is OK when doing an initial review, but your own personal opportunities for benefits and savings are what count.

  3. The benefits need to be reviewed and adjusted. Almost all ROI analyses start with ideal benefits, collected by reviewing several typical installations (case studies) to determine what benefits can be derived. The collection of these across all companies forms the benefits list and assumptions. But all companies are not the same, and even in the case studies, not all companies received all the benefits. So each benefit should be reviewed and adjusted to reflect the companies' own assumptions on benefit achievability.

  4. Costs need to completely recognize the initial capital investment, labor and services, business unit and user impacts as well as on-going costs. Only 20% of any technology investment is hardware and software costs, yet in solution provider's own ROI analyses these costs are often all that's considered leading to surprises during development, deployment and on-going management and support.

  5. Risks need to be included and reflected in the analysis, yet many solution provider ROI analyses fail to account for project risk factors, deployment schedules, less than 100% adoption curves and differences in realizing benefits of different types (hard vs. soft benefits). With only 20% to 30% of all IT projects coming in on time, on budget and with all desired features as planned, risk is a reality. Factoring in risk on vendor-provided costs and benefits will help to create a more realistic and achievable business case.

  6. When comparing different ROIs from different providers, make sure the assumptions are the same. We have found that often homegrown vendor analyses, often spreadsheet-based models, are developed by internal experts and have a lot of excellent information on benefits and costs. However, these models often use non-standard ways of treating different costs, benefits, risks and calculating key financial metrics. When comparing ROI analyses even within a single vendor, we have found major differences in assumptions and methodologies, much less across two or three vendors in a space. Be sure that you understand each solution provider's standard and force them to normalize and conform to your own methodologies or the most conservative of the group under consideration.

  7. Make the ROI your own. This is the most important advice I can provide. When you are done with the collaboration with the solution provider, you know it's a valid analysis when it's yours and not the vendor's. You've used the vendor to jumpstart the process, but you've taken ownership of all metrics, assumptions, risk adjustments, costs, benefits and so on such that you know its achievable and credible. It is your own.

This was first published in December 2005

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