Why Software Vendors Don’t Want to Know the ROI of Their Software

What This Article Covers

  • The Generalized Assumption of ROI
  • How ROI is Normally Calculated

Introduction

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.

Conclusion

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.

References

TCO Book

TCO3

Enterprise Software TCO: Calculating and Using Total Cost of Ownership for Decision Making

Getting to the Detail of TCO

One aspect of making a software purchasing decision is to compare the Total Cost of Ownership, or TCO, of the applications under consideration: what will the software cost you over its lifespan? But most companies don’t understand what dollar amounts to include in the TCO analysis or where to source these figures, or, if using TCO studies produced by consulting and IT analyst firms, how the TCO amounts were calculated and how to compare TCO across applications.

The Mechanics of TCO

Not only will this book help you appreciate the mechanics of TCO, but you will also gain insight as to the importance of TCO and understand how to strip away the biases and outside influences to make a real TCO comparison between applications.
By reading this book you will:
  • 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.
Chapters
  • 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

Why CRM Systems Have a Negative ROI

What This Article Covers

  • How CRM Systems are Presented
  • The Reality of CRM Systems
  • Compliance Issues of CRM

Introduction

CRM is “hot” right now as a software category even though in my estimation CRM in most cases has a negative ROI. I cover this at Brightwork’s software category page on CRM. Meanwhile, a software category with what is most likely a far higher ROI, like BOM/PLM software is far less commonly implemented. But the topic for this article is why CRM most likely has a negative ROI.

The Reality of CRM Systems

No one talks about this, but CRM is often used to deskill the customer service workforce. It also allows for jobs to be more readily outsourced to less expensive countries, so is a negative for employment in the development countries — but that is probably not a concern for most of the readers of this article. And it also allows management to snoop on sales people and to generally micromanage, which is negative for sales. In fact, that is one of the most common usages of CRM.

Compliance Issues of CRM

Since CRM systems were first introduced they have had unending compliance issues. That is salespeople have shown a distaste for putting information into CRM and therefore the data has a strong tendency to be out of date and inaccurate. Salespeople often say that they don’t have time to perform the data entry or to update the data every time something changes on an account. However, there is another unstated reason for the lack of compliance. If anyone has experience with VPs of sales, they tend to be control freaks, and the CRM system is their method of interfering with their account executives. Secondly, not only do account executives place fake numbers into CRM systems (in order to buy more time while they look for a job), but the VP of sales will also manipulate the sales numbers of their account executives as the VP will have their own set of incentives. Sales forecasts are a problem not matter what the system that is used, and CRM systems do nothing to account for that.

Conclusions

There is no evidence as to whether CRM does show a positive ROI. CRM should be the easiest application to show a positive ROI. This is for two reasons:

  • Implementability: It is a relatively simple application to implement. Of the 10 application categories reviewed by Brightwork Research & Analysis, it is by far the most simple application category. You can see all 1o of the software category analyses at the following link.
  • Maintainability: From a systems perspective, CRM systems are relatively simple to maintain. (Although from the compliance perspective they tend to fall off the cliff, at least the system maintenance, which is where the IT costs are incurred is low)
  • SaaS or Cloud: Related to the previous point, virtually all CRM systems are SaaS or Cloud. Which tends to reduce the long term TCO.
  • Direct Financial Traceability: It connects directly to sales. And sales are measurable. All that is necessary is to remove the portion of the sales that is due to the natural increase in the business. This can be done by reviewing the historical trend in sales over a number of years and adjusting.
  • Ubiquity: CRM is widely installed, it is the second most popular software category after ERP. Therefore there are plenty of case studies.

However, no one has ever performed a study that actually shows a positive ROI from CRM. That should make one immediately suspicious of CRM’s positive ROI. There are what seems to be an unlimited number of people proposing that CRM systems have a positive ROI. And yet no one willing to prove that it is the case.

References

CRM has failed? I am so tired of hearing that