As a business case analyst for technology investments, I’m mindful of how people use and misuse key financial metrics. Metrics like net present value (NPV), internal rate of return (IRR), return on investment (ROI), and payback period provide insight into the potential value of investments and how they compare to other options. Yet, it’s important to understand how these metrics work and when they can be misleading, particularly when it comes to NPV vs IRR. (more…)
By now, we all understand the value of cross-functional teams at the office.
Regardless of the project (creating a business plan, solving a supply chain issue, investigating a technology acquisition or sale, etc.), by including a diverse set of coworkers, you will create a team that can bring different insights and experience from all aspects of the company. The diversity of marketing, sales, and operations are commonly included in new projects, but don’t forget to include finance! This is a department that should not be overlooked (but often is!).
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:
- Metrics Gathering
- Collaborative Analysis
- Executive Presentation
I will review each step, so please read on and use this as a guide. (more…)
There are several new trends in the market that are having a significant impact on how customers want to buy and pay for new technologies:
- Accounting changes – under ASC 842 / IFRS 16 for end user/lessee, lease obligations are now on book
- Migration to the cloud – many customers are in the process of moving or planning to move at least some of their workload to the cloud
- Utility/usage-based/pay-per-use payment schemes
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. When you propose an investment, you’re 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?
“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…)
Significant changes in the environment have provided an opportunity for software vendors to make it easier for customers to acquire their software:
First, software license models are changing, moving from on-premises perpetual licenses to usage-based subscription models.
Vendor objectives are also changing, moving from a focus on upfront revenue recognition to recurring revenue streams.
This shifting market has had a marked impact on private label software finance. Private label financing simply means that the vendor provides the financing directly to their end users.
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.
We’ve received a lot of feedback on our earlier blog on OpEx vs. CapEx treatment for cloud-based technology purchases. And we continue to encounter customers who would prefer to capitalize their cloud technology investments for the reasons mentioned in the blog post (particularly those companies, or executives, who are concerned about EBITDA). So we’ve been looking at this more closely.
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.”