What This Article Covers
- The Generalized Assumption of ROI
- How ROI is Normally Calculated
It is frequently stated by consulting companies, Gartner and software vendors that this or that application has a high ROI. SAP is one of the most common promoters of the great benefits of ROI of their applications. In this article, we will get into how true this is and what vendors want people to know about the ROI on their applications.
The Generalized Assumption of ROI
Software vendors and consulting companies frequently use verbiage such as “improving ROI” for applications that have no evidence of having any ROI. One of the most surprising things is that even the grandaddy of enterprise software, the ERP system actually does not have evidence of having a positive ROI.
If we look at ERP, what was the evidence that ERP systems had a positive ROI? Well, I analyzed all the academic research on ERP systems and found no evidence for a positive ROI from ERP. I was so surprised by this result after being told the opposite by just about everyone; I wrote a book on these findings called The Real Story Behind ERP: Separating Fiction from Fantasy.
(you can obtain a positive ROI on ERP, but that is a different topic from what normally happens)
The problem, of course, is that vendors and consulting companies have a conflict of interest when describing the ROI of software. Software vendors and consulting are in the business of selling enterprise software. Therefore, there is a natural tendency to underestimate the costs of their applications and to overestimate the benefits. A high percentage of software implementations fail to provide any positive ROI, and a high percentage of software implementations actually provide a negative ROI. But even with the biggest software implementation failures, the software vendor and consulting companies that perform the implementation still benefit.
And who were the main proponents of system implementations being a necessary purchase? The software vendor, Deloitte, IBM, Accenture, Gartner, etc… And who were the main beneficiaries of implementations? Given the shortage of good ROI stories on implementations, the primary beneficiaries, that is the beneficiaries we can really prove are the software vendors, Deloitte, IBM, Accenture, Gartner, etc..
How Do You Calculate ROI from Software?
While the term ROI and improve ROI are thrown around quite carelessly, the consideration that is missed is how difficult it is to calculate ROI. Brightwork Research & Analysis has most extensive and automated total cost of ownership or TCO calculators that exist. Yet we while TCO is difficult enough to calculate, we don’t even bother calculating and ROI. The ROI uses the TCO estimate as the starting point, however, how do you actually estimate the return on a software implementation? There are ways to begin going about it, but it simply requires too many assumptions to really do. And that is the interesting feature of ROI. The people that make statements about reduced TCO don’t have any idea how complicated it is to calculate. Prior to creating our online TCO calculators, we read all the work that was previously performed on TCO. What we found is that almost all the entities that calculated TCO had the incentive to underestimate TCO by leaving things out. This is because most TCO calculations are performed by software vendors.
We then created our own TCO method which included far more costs than we had seen in any other estimate. Our method is documented in the book Enterprise Software TCO. However, we know that no software vendor even bothered to estimate an all inclusive TCO, so how can they possibly say they know the ROI of their software? They simply don’t have any idea.
ROI is not something that is simply calculated, in fact, it is nearly impossible. Whatever the ROI of software is, software vendors both don’t know what it is and have a conflict of interest in determining the value. Therefore, statements about the ROI of software should universally be disregarded.
Getting to the Detail of TCO
The Mechanics of TCO
- Understand why you need to look at TCO and not just ROI when making your purchasing decision.
- Discover how an application, which at first glance may seem inexpensive when compared to its competition, could end up being more costly in the long run.
- Gain an in-depth understanding of the cost, categories to include in an accurate and complete TCO analysis.
- Learn why ERP systems are not a significant investment, based on their TCO.
- Find out how to recognize and avoid superficial, incomplete or incorrect TCO analyses that could negatively impact your software purchase decision.
- Appreciate the importance and cost-effectiveness of a TCO audit.
- Learn how SCM Focus can provide you with unbiased and well-researched TCO analyses to assist you in your software selection.
- Chapter 1: Introduction
- Chapter 2: The Basics of TCO
- Chapter 3: The State of Enterprise TCO
- Chapter 4: ERP: The Multi-Billion Dollar TCO Analysis Failure
- Chapter 5: The TCO Method Used by Software Decisions
- Chapter 6: Using TCO for Better Decision Making