Return on Investment - Is it An Act of Faith?
March 26, 2014
Investing in Sales Performance Management (SPM) technology is typically a major decision for a business. This is due to the hard cost of software licenses and external support and the internal change effort. Businesses require a clear decision framework to help them develop a business case for automation with identifiable Return on Investment (ROI). Only by articulating an achievable and believable ROI, will it persuade all stakeholders in the business to support the transformation.
The OpenSymmetry 2013 Sales Performance & Technology Survey indicates a number of reported benefits as a result of automation: Increased payment accuracy, reduced administrative costs, improved reporting capability, reduced shadow accounting and improved auditing capability. There are also many case studies that indicate improved sales performance. However, each business situation needs to be treated on its own merits given the factors in play.
The decision framework comprises three critical factors:
- The compelling reason for investment as this provides the drivers and level of ownership for the potential project.
- The degree to which potential benefits and ROI can be quantified and the relative importance of tangible and intangible benefits.
- The quantification of the cost of automation.
If all three factors can be articulated, both costs and benefits are clear and the sales transformation project will have the level of sponsorship required to realise the benefits.
Reasons for Investment
The reasons for considering automation can be split into three types:
- Reducing cost or business risk. In reality, most businesses want to realise all three in order to improve sales performance. Companies with manual sales compensation administration processes or ineffective legacy/home-built systems often experience a high cost of administration. Depending on the complexity of the sales incentive plan, payment calculation error rates can be high and much sales time lost in resolving complaints. Reporting from these systems is often inaccurate. All of these factors increase risk to the business as well as cost. Some regulatory environments require specific levels or reporting and ability to report payments accurately.
- Improving operational capability. An improvement in operational capability may include the ability to launch improved incentive plans quickly to the salesforce, budget and forecast cost and communicate sales performance more accurately and in real-time.
- Delivering aspirational sales performance. Business are also looking for SPM solutions to help them drive aspirational sales performance – improved revenues, profit margins, increased market share, channel loyalty and overall competitive advantage.
Quantifying the Benefits
Our experience is that articulating a pragmatic and believable ROI it is vital for the adoption of a business case for automation. Most CFOs are sceptical of claims that investment cost will be recovered in a few months. This means that being able to determine whether a benefit is objectively measurable is important, so answering the question whether the benefit is tangible or intangible is key. Ultimately, a business needs to be comfortable that any quantified benefit is grounded in real numbers based on their business situation.
Tangible benefits depend on a measurable current state, such as the current error rate of commission calculation, turnover of sales staff, and numbers of full-time equivalent (FTE) staff involved in supporting the commission payments process. They also depend on a clearly quantifiable future state goals based on research that is relevant to the sector or size of business. Independent research firms like Gartner as well as, vendor case studies indicate quantifiable benefits.
It is important to recognise the probability of a benefit being realised. Realisation probability is driven by an organisation’s control over the benefit and the causal link between technology change and benefit realization. For example, it has control over the number of staff employed in sales compensation administration, but far less over an increase in sales profitability or the turnover of sales staff. ROI with high probability is most compelling.
Intangible benefits are just as important for a business in determining whether to go ahead with a project. For example, technology may be expected to provide added flexibility in the following ways:
- Response to changing structures
- Improve auditing capability in a regulatory environment
- More time reporting improving the decision making of sales management
- Increased credibility with the salesforce through accurate transparent reporting of sales performance
- More effective integration with CRM systems
Quantification of Costs
The final area of consideration in the decision framework is quantification of automation costs. Many businesses have an unrealistically low or high expectation of the cost of automation. Two scenarios play out here: 1) The cost of automation is assumed to be unaffordable and the project too difficult, possibly based on a previous, negative experience with a technology change, 2) A business can be persuaded that the cost of change will be low, yet pay a high in change requests as the new system requires additional effort to make it work.
In addition, cost splits into hard and soft costs. For example, software licenses and external implementation consulting are hard costs. Internal or soft costs include the project team time, management time and the cost of disruption to business as usual also need critical and realistic assessment.
Accurate scoping of the effort required is vital. Software costing needs to take account of potential growth in the salesforce and the number payees. The costs of implementation needs to reflect issues such as data quality, the number and complexity of data feeds into the new system, the complexity of the incentive plan structures and the number and quality of reporting required by the business.
Compelling Business Decision
An ‘Act of Faith’ is required where the objective evidence is not compelling. Developing a strong business case for automation depends, in our experience, on a realistic, achievable and qualified calculation of ROI. ROI helps to guide the business’s thinking and present the case to decision makers. We encourage you to take a moment and try our new business case ROI calculator to estimate your potential benefits from automation.
Ultimately, the decision to invest depends on the level of sales performance management pain being experienced by the business and its strategic direction. It also depends on internal client ownership, advocacy and a clear understanding of the cost of automation.
What challenges have you faced in determining business case ROI? Successes? We’d love to hear from you in the comment section below.