August 13, 2002

What's the ROI on your ROI sales tool?

by Bruce Hadley, SoftwareCEO

It's every sales consultant's favorite hustle right now: If you want to sell software, they say, you must be able to show your customers' return on their software investment. You can buy books, tapes, attend seminars, and spend many thousands of dollars developing return on investment (ROI) and total cost of ownership (TCO) tools. But is it worth it? We posed a few skeptical questions to some "been there, done that" software professionals.

How successful are these tools? "Not very," says Jeff Hill, EVP of sales and marketing at one of the oldest pure ROI tool development firms, Phormion Sales Tools. "The ability of the typical ROI sales tool, whether it's homegrown or developed by the 'experts' at an outside company, is often oversold."

"I think there is definitely a backlash against ROI tools," says Jim Zemlin, VP marketing at Covalent, developer of Apache Web server software. "Someone says to sell software, you have to show an ROI of six months — so a sales guy will play around with the numbers until he gets to a six-month ROI. Some companies are making huge claims that simply aren't credible."

But, Zemlin says, this doesn't mean you can stick your head in the sand; you simply need to do a better job: "Unfortunately you still need them. In fact, you need to cost justify your solution more than ever," he says. "The whole focus for software companies should be structuring it so that it's credible. We've got a real opportunity here to improve the industry."

How do you know what to look for? "If I were purchasing it as a package service, I'd look for something flexible toward my market," says Press Theriot, who directs all North American SEs for the McAfee Security Division at Network Associates. "If you're selling database tools, it's a whole different set of ROI variables than if you're selling virus software as we are. You want the flexibility to get as detailed or as high level as possible. If it's a custom-written tool, then I'd look for the most current industry standards as far as salaries, downtime, hardware costs — whatever my ROI variables are — so that if a field is blank, I can plug in a reliable number."

"That's the real value," Theriot says. "Is it a reliable ROI, or is it made up by the sales rep? A good tool avoids the misquotes, and creates a consistent image for your company. The more reps you have, the more likely it is that your message is getting washed out a bit."

How do I know if I need an ROI tool? Hill says there are four checkpoints:

• Are you selling business-to-business? "You don't need it for consumer sales," he says.
• Is your software high-dollar? "$10,000 is probably the absolute low end," Hill says. "With a gun to my head, I'd say $25,000 is the entry point."
• Is there a payback on your product? "There's no point building an ROI tool for a commodity app," Hill says. "Your software must be improving something."
• Are your prospects asking the question? "The first sign you need an ROI tool is that your sales reps are being greeted with the question," Hill says.

Zemlin says there are four key ingredients to a successful ROI sales tool:

Key #1: Provide the customer with a lot of input into the variables. "The more the customer uses their own data, the better your TCO credibility is going to be," Zemlin says.

Key #2: Provide sufficient detail. "The goal is to get the person closer to the deal, but these tools can actually extend the sales cycle, because you start arguing about the assumptions," Zemlin says. "For example, you're trying to show cost savings from the optimization of IT resources and reduction of headcount, and you assume 1/2 person to support a server, but the customer says, 'No, it takes me only 1/10 of a person.' Part of the problem is that lots or software companies really don't have a very strong ROI argument."

Key #3: Know the difference between ROI and TCO. "A TCO is a cost reduction sheet, where you are looking at optimizing an operations environment," Zemlin says. "An ROI says that if you if you automate this system, you're going to reduce costs by 50% — Ariba and Commerce One had great ROI models, for example. In one case you're reducing cost, and in the other you're getting a business benefit."

Key #4: Know the difference between soft costs and hard costs. If you're comparing Linux, as an example pitch, you'll have hard cost savings on hardware and software. The system's reliability is a soft cost saving, because you'll have much less downtime. "It's a heck of a lot more difficult to sell soft costs than it is hard costs," Zemlin says. "The customer is going to challenge every point: 'Where do you get that?' It's back to rule #1: The more you get a customer to provide input — for example, to tell you what they think downtime cost is — the better your model will be."

How can you figure out who knows what they're talking about? "I'd start by calling and investigating the companies that are doing it," Hill says. "Do a Google search on 'ROI.' Many of those companies have an off-the-shelf solution; we don't believe in doing it that way." Hill suggests you ask all potential providers for examples, references, and a walk-through of their development process. You'll need to negotiate ongoing support, ownership and exclusivity: If you don't want your competitors to get their hands on the ROI tool you paid for — or a similar-looking knock-off — get that written into the contract.

How much should you budget? "You need to figure out how big a part in your process is ROI going to play," Theriot says. "If it's your primary pitch — it's what you rely on to get the deal — and your average deal is $50,000 and you do several every quarter, then $500,000 may not be much too spend on ROI tools. We have a series of ROI tools we use, depending on the products we're selling — but we don't necessarily use an ROI justification in every sale."

"If your budget is $5,000, you're going to have to do it in-house." Hill says. "If you're not budget constrained, I think it makes sense to hire professionals — it's going to cost you more money, but you're going to get better work." Hill says a customized, Web-based ROI tool will set you back $30,000 to $50,000 for a turn-key solution, including training.

How long will it take? If you have a custom tool developed, it will take two to six months, Hill says. Training should be quick: "The average sales person learns it in half a day, then needs one or two sessions to gain mastery," Hill says. "The real difference between success and failure has to do with the introduction method in your company," Hill says. "Is it e-mailed by a product manager as an FYI, or is it introduced by the sales VP as a mandate, with meetings and explanations?"

"If it's written correctly, and the thought is put into the business, typically the reps and SEs should see the benefit from the ROI tool immediately," Theriot says. "Whether they know it or not, they're talking ROI already, because they know how your software will help the customer's business. If they aren't — if they don't know the business, then you've got the wrong people, and you've got a much bigger problem than ROI."

Further research
There are at least a dozen companies that market and sell ROI sales tools services and tools, including: Alinean; Cedar; Cold Day, LLC; e-Cosystems; eJustifyIt!; FutureSight Consulting; Hobson & Company; Kotler Marketing Group; Nucleus Research; Phormion Sales Tools; ProveIT; ROI4Sales; and TraceWorks.

Additionally, many traditional business-consulting firms have ROI tool practices, the most notable being Gartner, Hurwitz Group, and KPMG.