Is the definition of Value equal to a Return On Investment?

Recently I heard a definition of value from an executive of a software company. The definition went something like this: “Added value is the pain that is solved for a given business”. In this case, it is the pain that a software solutions provider can solve for a given business doing an ROI (Return on Investment). Say a customer is having problems tracking and processing orders. A Software sales person comes in and does an ROI to be of "value" to the customer.

The questions begin with, how many orders to you process a day/week/month/year? What is the average order amount and how many orders are canceled or lost because of poor handling?

Say $50 per order is the average, 1000 orders are placed per month and 250 orders are canceled or lost due to poor handling. This ROI formula can be summed up in this question: how much does it cost not to solve a given problem? The ROI could also revolve around different problems.

Now that I have numbers, I can do my math. 1000 orders per month X $50 per order = $50,000 in revenue per month. Now take 250 canceled/lost order X $50 per order = $12,500 in lost revenue per month. This equals to $150,000 in lost revenue a year.

After the ROI analysis, the customer is proposed a solution to solve his or her pain for $150,000 which will give the ROI in 1 year. Great! The sale is done. Hold on a minute. If you are my reader, I hope you are skeptical at this point. Think about it for a minute. The ROI formula = value is ineffective and here is why.

First, I have so far to see any software sales person use the ROI formula successfully. Software sales people do poorly in consultative engagements and business analytics. Any consultant who is good at what he does and who has the customer best interests in mind should know the shortcoming of an ROI analysis. My suggestion is that software sales people and executives buying into simplistic ideas such as a ROI should use them on their own organizations first.

ROI falls flat on its face as a value proposition because the first problem is: how do you measure an ROI? What I have presented above looks really good in theory. Using it practically is a different story. ROI is mostly guess work at its best when attempting to solve problems in poorly managed businesses and not easy to do in well managed businesses. If a given business has a poor system for tracking orders, how will they have anything in place to come up with realistic numbers as outlined above? But let's say a business owner makes a decision to buy a solution if a software sales person manages to persuade him base on ROI analysis.

If the decision is solely made on ROI, then these questions must be answered. Who will be responsible and accountable for measuring the ROI after the sale? Will the software sales person take on this role or someone else? What if the ROI is never realized? How does that speak about the competence for the software sales person?

Most business executives with all kinds of problems in their organizations are afraid to have a realistic look at the unrealized revenue in doing things poorly, never mind doing a realistic ROI. For the software vendor, the billable hour is the cap on unrealized revenue. For the business with poor order tracking, it is a pricing strategy that is lacking. It is a matter of facing real problems, which if pointed out to the executive or software sales person, would either not know what to do or avoid facing them.

Let's say a consultant is faced with a problem to be solved. After asking realistic questions and unable to get strait answers and facing resistance, he or she should know when to back off instead of just making another software sale. Software sales people sell software and have a very poor concept of value selling and consultative engagements.

Granted, on a technical level a ROI analysis may be useful but as a value proposition it has no merit. Value is subjective to the customer and should that involve a ROI analysis it could be part of a value proposition, perhaps only a very small part. Value is created based on perception and then captured by a strategic pricing model. It is multidimensional and simplistic thinkers do poorly with multiple causes and seeing whole pictures.

To actualize a value proposition, one needs to have a good understanding of economics and pricing. Also as an organization, visionary leaders will be crucial in creating and capturing value. For the software vendor, the billable hour stands in the way of creating and capturing value. The most evident of this is in demoralizing and undermining the knowledge worker by the leaders in software vendor companies.

Quote on thinking

I've been traveling in the last while and perhaps a lack of inspiration, so I have not posted for a while. For today it is an inspiring quote from a book I'm reading right now. The book is called The Road Less Traveled & Beyond by Scott Peck. It’s the second time I’m reading it.

"It should go without saying you can't truly communicate well if you don't listen well, and you are unable to listen well unless you are thinking well"

Time, a unique resource

Here is a writing from Peter Drucker on time.

Time is also a unique resource. Of the other major resources, money is actually quite plentiful. We long ago should have learned that it is the demand for capital, rather than the supply thereof, which sets the limit to economic growth and activity. People -- the third limiting resources -- one can hire, though one can rarely hire enough good people. But one cannot rent, hire, buy, or otherwise obtain more time.

The supply of time is totally inelastic. No matter how high the demand, the supply will not go up. There is no price for it and no marginal utility curve for it. Moreover, time is totally perishable and cannot be stored. Yesterday's time is gone forever and will never come back. Time is, therefore always in exceedingly short supply.

Time is totally irreplaceable. Within limits we can substitute one resource for another, copper for aluminum, for instance. We can substitute capital for human labor. We can use more knowledge or more brawn. But there is no substitute for time.

Everything requires time. It is the only truly universal condition. All work takes place in time and uses up time. Yet most people take for granted this unique irreplaceable, and necessary resource. Nothing else, perhaps distinguishes effective executives as much as their tender loving care of time.

Man is ill-equipped to manage his time.

Peter Drucker