A return on investment (ROI) analysis is a useful tool for evaluating a variety of business opportunities. Technology investments, business process projects, and marketing campaigns are just a few examples. When fighting for budget or preparing a cost-justification, knowing how to do an ROI analysis allows you to compare a potential investment to other initiatives or make a go-no-go decision.
While the ROI calculation is simple (ROI = (Total Benefits – Total Costs) / Total Costs), creating a comprehensive ROI analysis (also known as a business case analysis, cost-benefit analysis, or business value assessment) can be complex. But after performing thousands of ROI analyses for clients, we’ve found that you can break down the process into 4 steps:
I will review each step, so please read on and use this as a guide. (more…)
For customers, there are a lot more nuances to consider than just the traditional CapEx vs. OpEx determination, and how much budget is available. Many customers are operating under great uncertainty regarding the number of workloads in scope, and how quickly to migrate to the cloud. Meanwhile, savvy customers are also trying to optimize value on every dollar they spend regardless of the type of budget.
The implication to technology vendors in this era of increasing complexity is clear: making a successful sale today requires a lot more than just having the best technology at the lowest price. Vendors who can skillfully combine their technical savvy with the ability to evaluate customer economic and budget constraints in light of the evolving economic requirements are better positioned to increase their batting average, and at the same time gain customers’ trust as a good partner.
Financial metrics, like total cost of ownership (TCO) and return on investment (ROI), are fundamental to making asset and technology investment decisions. This is true whether you’re the CIO of a large corporation, an entrepreneur at a start-up, or even the seller of a desired solution. When you propose an investment, you’re typically fighting for budget. You need an objective way to demonstrate the value of the proposed purchase. But what can you learn from TCO vs ROI and which metric will help the most? (more…)
“Accounting is the language of business…” Warren Buffett
It may not be obvious, but it’s critical for sales and other non-accounting professionals to stay current on new accounting standards, including ongoing updates issued by the Financial Accounting Standards Board (FASB) and the International Accounting Standard Board (IASB). Accounting standards and updates can impact corporate strategy and decision making, including how to best access, use or acquire technology, which is why we pay close attention to accounting.
First, some background on FASB and IASB. What are these organizations?
The Financial Accounting Standards Board is a private, non-profit organization, standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the United States in the public’s interest. New standards are issued by topic and number as Accounting Standard Updates (ASU) and then finalized as Accounting Standards Codification (ASC); older standards were issued as Financial Accounting Standards (FAS), Statement of Position (SOP) modifications and few other acronyms, most of which are being superseded by new ASC standards. All standards are refined and updated on an ongoing basis. (more…)
When deciding to buy a new technology or business asset, companies typically evaluate if that investment will “pay for itself” using financial metrics like return on investment (ROI) and net present value (NPV). ROI and NPV matter to both the buyer and seller because they are the foundation of building a business case for the investment. These metrics make it easier to compare investment options that are competing for the given operating and/or capital budgets. So, ROI vs NPV, what exactly are they and what do they tell us? (more…)
In my eight plus years at TFP, I’ve engaged in more value conversations than I care to count. Most have gone reasonably well; at the end of the process, our value selling team—usually my client, their customer, and me—can usually produce an effective financial analysis that helps the customer understand the potential value of my client’s technology in their environment.
The occasional engagement has gone sideways. Periodically, I look back at those conversations and wonder what I could have done differently. In some cases it wasn’t going to end well no matter what I had tried. It might have been a “hail Mary” ROI to rescue a floundering deal. Or the customer wasn’t really engaged in the first place, and wasn’t willing or able to devote the time to make the process useful for anyone.
One interesting consideration is introduced by some new IFRS (International Financial Reporting Standards) guidelines that took effect at the beginning of 2019. Of particular interest are the changes related to the IFRS 16 standard which say that going forward, virtually all leases must be treated as CapEx. Why this matters has to do with the definition of a “lease.”
On January 1st, 2019 a new lease accounting standard, IFRS 16, came into effect for all companies that report under the International Financial Reporting Standard. Under IFRS 16, virtually all leases must be shown on a company’s balance sheet. This can have an important impact on large technology purchases and to technology vendors who hope to make it easy for customers to buy. Let’s explain why.
In general, leases have been of two types: finance leases and operating leases.
My colleague, Drew Wright, wrote a piece a couple of years ago invoking both the Gene Simmons novelty-rock band and a reminder that “Keep it Simple Stupid” doesn’t always apply (like when applying discount increments).
For me, when I think about keeping it simple, I remove
the last S, because none of us are stupid and keeping it simple can frankly be
hard. After all, simplicity can be is the ultimate sophistication.