https://kenkantzer.com/technology-roi-discussions-are-broken/ Skip to the content Ken Kantzer's Blog logging my thoughts on technology, security & management Toggle mobile menu Toggle search field Search for: [ ] [Search] * Home * About * Home * About Technology ROI Discussions are Broken April 27, 2022 / Ken / 0 Comments [e609f4fe0033] VP of Engineering @ FiscalNote | Erstwhile Head of Security @ FiscalNote | ex-PKC co-founder | princeton tiger '11 | writes on engineering, management, and security. Opinions, my own. Technical leaders need better tools for communicating the value of technology, and especially technology innovation. This is not a trivial task--and the point of this post is that the most commonly-used tool for communicating value like Return on Investment (ROI) is deeply broken. Instead of using ROI, I argue that we should actually be arguing for technology innovation by making the case for how it will break the existing ROI model. This approach is a much higher bar, but especially as the internet-wave of technologies are hitting maturity, its necessary to become increasingly discerning--skeptical, even--of overly simplistic, ROI-based arguments for technology investment. What's Wrong with ROI? Almost all budget processes require new investments from technology to be framed in terms of the return those investments will produce. Say you're trying to decide whether to migrate infrastructure to the cloud. You'd tabulate yearly costs on current infrastructure (summed over a 2-5 year period, depending on how finance wants it), and include an estimate of soft-costs to maintain and complete activities on that infrastructure. Then you calculate the costs to migrate, and the migration-complete costs. If the business will break even and begin saving money within an acceptable window of time, say three years, then the business case is viable. It'll end up looking something like this: typical ROI investment business casesource: https://wisconsin.edu/ systemwide-it If technology was all about operational efficiency, this would be great. But the problem with ROI is that sometimes technology can also deliver value that can't be described in your typical ROI model. For example, how do you know if a new technology that enables a completely new way of engaging with customers will generate more revenue? You don't (if you're honest), and even if you do, how do you quantify that in a financial model? What is Value? One of my old bosses used to ask this question whenever we'd propose a new technology: "yes, but does it change the math?" What he meant was, is this something that changes how we can operate in some fundamental way, such that the equations and models is actually different now? If the answer is no, then the discourse on the change should be based on efficiency, so we'd go ahead and talk about ROI. Things that "change the math" are almost inherently problematic for ROI discussions: if you're arguing the model itself is going to change, modeling the change in one, consistent model is very difficult. You may have new variables that didn't even exist in the old model, and those new variables (if you're being honest) have no historical precedent. But the part that you shouldn't miss is that asking the question this way allowed for a richer discussion about value that was completely distinct from an ROI discussion. How to Properly Discuss Technological Value So, if ROI is sometimes insufficient, what can work? Well, I like to use this graph to frame the discussion about value: alternative to ROI is a paraeto-graph showing tradeoffs between two strategic objectives held in tension Usually viable business models stabilize on a balance between two strategic objectives that are at inherent tension with each other. For example, Cost and Quality. If you skimp too much on cost, quality goes down. If you pursue quality at all costs, your costs will rise. Your business has not only picked a "sweet spot" on that curve in terms of profitability, but has also defined a curve that gives it the ability to adjust to changes in the environment: businesses can move along the tradeoff curve, but can't break it If a new competitor enters the market, and they're offering crazy quality, you can respond by "moving up the curve" and opening up a premium-service line that costs more. If a low-cost competitor enters the market and surprises you by gaining a lot of traction, you can "move down the curve" and cut costs at the expense of quality. But what you can't do is break that curve. Or can you? That's where technology is so important. Technology that's truly innovative helps businesses break that curve: technological innovation offers the promise of breaking the tradeoff curve There's no great way to properly represent this in a traditional ROI (that doesn't stop everyone from trying though!) I think what we should do is actually produce a document that attempts to convince leadership that the model itself can be altered with the given technology. In what ways do you think the model is broken? How, exactly, will the new technology change that? What does the new model look like, and how is it better? These are the important things to get everyone to believe in. Wrap Up I love this approach, because it forces you to explicitly define the innovation in terms of the current business model. This often exposes the problem with the potential innovation investments right away: when we draw this graph and pick the axes, the other business leaders say: "well, I don't actually care about the two axes you defined, because while they exist, they aren't fundamental to the business vis a vis the investment you're proposing." Now you've arrived at truth, fairly quickly! Let's go back to the discussion about infrastructure migration. The ROI case we sketched out is very typical. There's probably even templates floating around that CIOs and CTOs could use to make the case. But I think if we're being honest, the argument is missing something, isn't it? If the ROI discussion was really so straightforward, when Netflix moved to AWS, everyone would have immediately piled on. But there were skeptics for years. What were they skeptical about? Well, the reality is that cloud infrastructure isn't a little better because it makes it a bit cheaper to run servers. It's way better, because it largely removes infrastructure as the bottleneck for innovation. Your graph, then, looks like this: netflix's move to AWS allowed for higher hardware utilization while simultaneously dramatically improving operational flexiblity How do you represent that as ROI? And yet, it's the fundamental factor in cloud-enabled technology. Share this: * Twitter * Facebook * Reddit * Email * Uncategorized Previous post 5 Software Engineering Foot-guns Leave a Reply Cancel reply Your email address will not be published. Required fields are marked * [ ] [ ] [ ] [ ] [ ] [ ] [ ] Comment * [ ] Name * [ ] Email * [ ] Website [ ] [ ] Notify me of follow-up comments by email. [ ] Notify me of new posts by email. [Post Comment] [ ] [ ] [ ] [ ] [ ] [ ] [ ] D[ ] About This Site This may be a good place to introduce yourself and your site or include some credits. 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