G.David Dodd has written a guest post on the ADAM blog where he follows up some of the observations I have made about ROI. The analysis piece covers the wider discussion area of marketing technology investments in general, not just DAM. His article handles the ROI subject more skilfully than I have and he covers some alternative methods which I did not, for example, this on ROI Thresholds:
“The key to this approach is something called the ROI Threshold. This is the minimum ROI that your company requires investments to produce. The ROI Threshold is typically equal to your company’s cost of capital, or perhaps the cost of capital plus a risk premium. The cost of capital calculation can be relatively complex, but you can usually obtain the value from your company’s chief financial officer.” [Read More]
He also mentions the risk perspective and how that rarely gets considered adequately in ROI evaluations. David makes a valid point about how the overall impact of the investment on the bottom line is more important than the measure of the efficiency improvement alone.
It is good to see some reality finally getting injected into the discussion about ROI, especially with respect to marketing technology. I don’t have a problem with ROI in the sense that an organisation needs to see positive gains from the capital committed, it’s the methods by which both staff who require an item of marketing technology and the suppliers of it are effectively coerced into having to invent numbers to suit a financial forecasting model which is flawed.
I can’t say whether this is the case for other capital expenditure ROI evaluations as I don’t know enough about fields outside technology to offer an opinion with any authority (my expectation is that there probably are more than a few others though). One point I would note with technology is that once deployed, providing it is set up properly and monitored diligently, it should provide the tools to start to measure ROI more accurately than before it was introduced and that enables more informed decisions to be made.
Many of the current ROI models inadvertently encourage excessive risk taking with an organisation’s hard-won capital. That has to be the opposite of what those who want to see ‘proof’ of ROI are aiming for and might be a contributory factor as to why so many technology investments are subsequently deemed failures. A less top-down approach that is based on an incremental funding model where the results are tested and frequently reviewed would appear more suitable, especially for investments into highly fluid sectors like marketing technology.