By Jack M. Keen
I was stunned
when I first heard it. The directive came from a senior executive of a global,
old-line firm in a capital-intensive industry. He was encouraging his ROI
business-case developer to use soft, rather than hard, benefits for justifying
a proposed systems project.
What a sea change
from the “all tangibles, all the time” mentality of the previous 40 years!
If select senior managers in the most conservative of industries are finally
beginning to see the power of soft ROI benefits, can the rest of the world
be far behind?
I was curious why
this successful leader now supported the “soft” side of ROI justification
strategies. When asked, he said that all the true “hard” benefits had
been exhausted by prior systems implementations. There weren’t many operations
staff members left to be laid off, there were no materials left to be
saved, and there was no overhead left that could be chopped. In short,
he was forced to recognize soft ROI benefits. But he wasn’t about to quit
investing in IT.
The timing of this
shift in ROI decision-making mentality is fortunate. We are now facing
more IT project justifications that are oriented toward soft benefits.
Knowledge-management systems, Web infrastructures, and employee support
systems are prime examples. These projects bring small increments of productivity
improvements to hundreds, if not thousands, of employees. They may also
bring ROI decision-making advantages, which are only one or more steps
removed from a hard benefit result. In the case of infrastructure projects,
ROI soft-benefit justifications are means to a more distant end, like
telephone poles along streets, which eventually make home telephone service
possible.
To take advantage
of managers who are now beginning to understand soft-benefit advantages,
here are four considerations to help make your soft-benefit-oriented ROI
business case more successful.
1. Distinguish
the type of ROI benefit. ROI benefits are distinguished in three types:
hard benefits, soft benefits, and quantified-soft benefits. Hard benefits,
also called “tangibles,” are both quantifiable and expressed in monetary
units. Labor savings from the dismissal of four finance department clerks
is an example. Soft benefits, or intangibles, are those payoffs considered
by the ROI business-case audience as neither quantifiable, nor expressible
in monetary units. “Improve employee morale” might be an example cited
by a hard-nosed CFO with little tolerance for anything less than “shoes-out-the-door”
benefit computations. Quantified soft benefits are calculated monetarily,
but kept out of the ROI equation. An example might be an HR director’s
claim that “improving employee morale” will save $200,000 in replacement
costs. The HR director documents it, includes it in the business case,
but uses it as an addendum to the ROI calculation, not an integral component
of it. (An example of this “bundling” of quantified soft benefits is outlined
below.)
2. Preach that
“tangibles” exist only in the eye of the beholder. Tangible benefits,
in spite of their name, are an opinion-based ROI forecast. The hard ROI
benefit example cited above is tangible only because the action–employees
being fired–is measurable, highly visible, easily understandable, and
consistent with the observer’s prior experience.
In contrast, items
classified as soft benefits, such as “improve employee morale,” may actually
produce hard savings. However, only an HR director may see this cause-and-effect
relationship because of their in-depth knowledge of the true reasons behind
employee turnover.
Labeling a benefit
as “soft” doesn’t necessarily mean that hard ROI payoffs don’t exist.
It only means that its tangibility is not apparent and/or acceptable to
the decision maker.
3. Bundle enough
soft ROI benefits to make them hard. If you put enough pillows into
a sufficiently big container, then its weight will crush the hardest of
stones (or hearts). The same is true of intangible benefits. A successful
technique is bundling groups of quantified soft ROI benefits together
into categories called “high impact benefits,” “medium impact benefits,”
and “low impact benefits.” Strive to make the total calculated value of
each group at least equal to the tangible savings that have already been
identified.
For example, let’s
say a knowledge-management project requires a savings of $500,000 per
year to be funded, but the official tangible benefits total only adds
up to $300,000 annually. Your job is to uncover quantified soft benefits
of at least $300,000 for each of the three impact categories. That adds
up to $1.2 million in total savings ($900,000 in total intangible savings,
plus $300,000 in tangibles) and puts you $700,000 over the needed total
savings goal. This extra savings gives you a buffer zone for intangible
assertions that may, in spite of your best intentions, be discarded by
the final ROI decision makers.
4. Be on the offensive.
You need to believe in the power and relevance of soft ROI benefits. Many
of the world’s greatest business success stories are built on the back
of courageous business-case creators who convinced IT executives that
“hard to measure” IT investments don’t automatically mean “bad” investments.
For example, Wal-Mart’s
decision to employ an ROI project that was not justified with hard benefits
(a cleverly automated logistics system), which led to an eventual takeover
of retail leadership from K-Mart, is a prime example of a “competitive-edge-based”
soft benefits business case reaping hard benefit rewards.
To paraphrase Winston
Churchill’s comments after an early World War II British victory, recent
developments are not the end of tangibles-bias in ROI business cases.
They are not even the beginning of the end-but they might be the end of
the beginning. Taking a hard stand on soft ROI benefits may be just the
message your executives need to get IT funding right. //
Seen other examples
of the hard realities of soft ROI benefits? Give me the hard facts via
e-mail to [email protected].
Jack M. Keen
is founder and president of The
Deciding Factor, a Basking Ridge, New Jersey- based international
consulting firm specializing in the development of simple, but powerful
ROI calculation models, tools, best practices, and workshops for building
better business cases faster. A frequent guest speaker, Keen has advised
more than 100 organizations in 15 countries.