Why focusing on ROI for your business case could backfire
Once upon a time there was a company. Said company had some bright minds who came up with great ideas. Some ideas were promoted to projects and some of these were successful.
Sounds like a promising start to this story doesn’t it? The sad thing, however, is that most ideas did not see the light of day since no budget was filed for it last year.
Of course this is just a story, but it reflects what happens all around us. And it happens a lot! Though the necessity for budgeting is understandable, internal budgeting and related decision making processes can be a menace to innovation. One can only imagine how fintech companies are thanking the established financial institutions for this.
But even when budget is allocated, there is no certainty that a specific project will start. Management still needs to be convinced by a positive business case.
So what normally happens is that the group of bright minds start gathering possible benefits and costs. They do a thorough job by performing research and interviewing business owners, business users and of course IT. All the information they gather goes into an Excel file and by using the WACC to calculate the present value of projected cash flows they get a NPV, hence ROI. Hopefully a positive one!
Sounds familiar? Now read this paragraph again, keeping in mind that the project is about creating an educational website about complex financial products.
And here’s the catch. How can you justify a business case without heavily relying on assumptions when there is no direct financial relation to benefits? Well, the easy answer is; you can’t. And the best answer is; you shouldn’t. Traditionally ROI was used for quantifying the viability of a project that required a one-time investment. Online projects do not fit well in that definition. A different approach is therefore required.
So, instead of asking the same group of bright minds to create a financial business case, let’s ask them to help define objective metrics that can indicate the level of performance of the project.
This does not require any assumptions at all about possible benefits or costs, but simply states how you are planning to measure the result of the investment.
From here on it is a short step to add your ambitions, allowing you to further specify what success looks like for you.
In the example of the educational website you could have:
Customer Goal 1: I want to learn more about structured products
Metric: The average time per session spent on education pages per month
Ambition: At least 3:30 minutes average per session per month
Customer Goal 2: I want to test my knowledge of structured products before I start investing
Metric: The average number of tests taken per month
Ambition: 20% of the new visitors per month take the test
By defining these metrics, you create room for a valuable dialogue about the investment on one side and how you can provide insight in results on the other.
So, instead of hoping you made the right assumptions for getting approval on your multi-K project, you could also provide decision makers with a clear overview of how you are going to measure results of the project from the start. This supports an agile approach where you can validate or reject hypotheses fairly quick, allowing you to adjust focus when required. Fintech anyone?
There are various ways of capturing this. At VI Company we sometimes use the HEART-framework from Google, where we formulate goals, hypotheses and the metrics to test them. The ‘how you do it’ is of course less important than just doing it.
Does this approach guarantee success? No it does not. And you still need to decide if an investment is worth it or not. Instead of starting a project blind and based on assumptions, you can gain insight in performance based on objectives metrics.
With this insight you can validate hypotheses and iterate towards success.
The next time somebody asks you about your project you have something to show for. We call that Result On Investment.
Of course, the above represents our experiences. We would like to hear your experiences as well. How is your decision making process supporting your customer’s needs? Do you have insights in the performance of your online projects? Are your ideas making it into projects?
Feel free to get in touch with us.