Investment to Return

The Xpragmatic View #143
May 8, 2010
by Marc Buyens (@mbuyens), Xpragma
marc.buyens@xpragma.com
url: http://www.xpragma.com/view143.php
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In business, most investment decisions are based upon a Return on Investment (ROI) analysis. This is OK as long as the assessment of the potential outcome can indeed be made in a realistic and objective way. Otherwise it simply becomes a leap of faith or the false excuse for not investing.

We humans love certainty and therefore, when making decisions, we want to be convinced that indeed, we are making the right decision. However, very often it is nearly impossible to deliver this "absolute proof of success".

Typical examples of this are customer-facing process improvements. To what extent will they indeed increase our market share? Same goes for enterprise social tools. Will they really improve collaboration and if so, what will this bring to the bottom line?

Interesting, yet difficult questions to answer.

However, in such case, we should not try making a better or more complex assessment of the future return. In this type of context we must avoid using such ROI-style approach since it will make that we base our decision making upon something that a) is very difficult to quantify correctly and b) whereof we do not understand the linkage between action and outcome. This is also called gambling. Technology vendors love this approach.

In this type of situations we are measuring or estimating the wrong thing: return. Return is not a variable that you can manage or change. Return is a consequence. Therefore, when there is no perfect way to calculate return, you have to move your decision making to the things that cause return to happen.

So, in this type of context, we suggest using an approach that we call "Reverse Interaction Modelling" that essentially approaches the problem by answering the following questions:

What is our desired "successful outcome"?
What are the things that would make this successful outcome to happen?
What makes that these things don't exist or don't happen yet?

Now, with that last question, you are in well-known territory. This is the world as it exists in your organisation today. Therefore, you should have ample opportunity to measure and to quantify things.

The next step then is to assess to what extent a changed approach, a new tool or whatever you are evaluating really will remove these identified burdens and will contribute to the improvement of "the things that would make".

Agreed, this is again something that is not 100% quantifiable, but at least, it brings the analysis to a more down-to-earth level.

"If we reduce the throughput time of this process by 50%, is it worth you $10.000?" is a question a manager should be able to answer. A manager who knows his business should be able to assess the value of such an improvement and to compare it with the potential value of the other things where he could spend this $10.000. Not an exact science of course, but good enough. As a manager, you are paid for making correct decisions based upon incomplete, yet reasonable and understandable information.

"If we spend $10.000 on this new tool, will our return be more than $10.000?" is the type of question where the link between action and outcome is somewhere deeply buried in the complex references of an excel worksheet.

In a similar way, if you bring the discussion to the level of the "things that should happen but don't do it yet", then it becomes much easier to assess whether the new approach or tool will indeed address the issues you identified and deliver the improvements you want.

Quantifying the future return of a given initiative carries the illusionary promise of absolute proof, but in life and in business it is more important to know the right direction than to know the final destination.

About Marc Buyens

Marc Buyens is analyst, management consultant and owner of Xpragma. He started Xpragma in 1999 after a 20+ years career in the IT sector. Today, he provides advice, training and mentoring services focusing on the intersection of technological evolution, organisational change and business strategy: a messy world of unfulfilled promises.

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