Return on Ignorance: The Highest form of ROI
ROI is the crux of the matter. Every business intelligence customer wants to know that, sooner or later, they’ll have something to show for all the expense and hassle.
To ponder the meaning of it all — or just to learn how to sell with ROI — 19 BI experts and vendor representatives gathered one morning in July at the annual Pacific Northwest BI Summit at the Weasku Inn in Grants Pass, Oregon. In less than 90 minutes, they showed that the event really is a summit.
I’m sure most of the 19 would rather talk about more familiar topics, like data and technology. Whether that was behind the flicker of annoyance I may have noticed at the start of the session, I don’t know. But the undergraduate business class content of the first few minutes must have grated — all about net present value, discount rates, and cash flow — even though they would need all of it later. William McKnight, author and consultant, led that part.
Calculating project-related total cost of ownership, he explained, and program-related ROI all depends on a few basic estimates: cash flow, net present value, discount rate, best and worst cases all must be gathered. “You need a path to get to those numbers,” he said, “and the people who have them are usually not in IT.”
The average BI consultant that he seemed to imagine sounded most at home in IT. “We’re good at listing tasks,” said McKnight in a segment on the shortcomings of everyday BI consultants, “and laying out what to do next. We’re not good at estimating returns. We’re overconfident. We’re not good at estimating risk, and we’re not good at people costing.”
Lecture complete, the discussion graduated, as if skipping a grade, even skipping graduate business school altogether and fleeing into a different kind of conversation.
How you look at ROI varies by what you’re trying to do with it, said discussion co-leader Scott Davis, like McKnight, a leader in the BI industry. “It’s all about sustaining versus creating. The creating side of life is messy.”
Davis knows about the creating side of life. Not long ago, he abandoned a conventional life in Boulder, Colorado and created a new life on the Caribbean. He now helps run his still-thriving software development company from a large sailboat that he and his wife sail from island to island. He joked, “It’s ironic that a guy without a country and living on a boat gets to talk about the ultimate corporate metric.”
The big innovations, the game changers, don’t fit on spreadsheets, he explained. They defy predictions of ROI, because ROI depends on known figures while innovation starts from ignorance. “You simply can’t sit there with a straight face and say we know all the impacts this will have on your business. You can’t do this.” If your pitch seems half-baked, it’s because it really is half-baked.
But there is a way to talk about it. A company may start with big questions: What if we could do this new thing? What don’t we know about this or that? Do we have the skills? Will the new business be compatible with our existing businesses? Such big questions precede big answers.
All that sounds risky, but knowledge trims risk bit by bit. “‘Everything that we try informs us in some way,’” Davis quoted former Merck CFO Judy Lewent, who famously invented a way to guide the company through high-risk research.
Lewent refigured ROI. Instead of estimating value at the end of a project, she estimated it at the end of interim steps. Each “learning milestone,” as Davis put it, reduced risk at a fraction of the project’s total cost. With each eliminated unknown, the risk-adjusted discount rate fell. Each time that rate fell, the project’s value rose.
“Return on ignorance,” quipped Donald Farmer, QlikTech vice president of product management. When the laughter died, he continued, “If you decide in advance what your measure’s going to be, you’re only going to perform to that measure.”
Another enemy of innovation is the penalty for launching something that’s expensive and doesn’t work, noted SAS vice president of best practices Jill Dyché.
Davis said toward the end, “The riskiest part of selling an innovative project is that people won’t understand you.” People tend to see data in the context they know rather than to let the data suggest another world that lurks close by, he observed.
“We must frame in advance, so that when the data gets there, people see the data through our narrative.” They will understand the narrative and thereby understand the true story.
He said, “You can’t win on the spreadsheet.”