ROI – There’s gold in them there spreadsheets

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Friday, April 1, 2005

Newsflash - the business environment is changing. Specifically, business today is more metric driven. There is more competition in most industries, and certainly in other uses of the most finite resource, money. Understandably, buying decisions are moving up the corporate ladder and tend to use more analysis. This trend should send a chill down the collective spine of the “order takers” of the world, as they are now face to face with buyers who may be asking questions for which they have no answers.

But in threat lies great opportunity. It is truly evolve or die. The answer lies in the message, specifically the content. One hears a lot of talk in the marketplace today about value. We value our relationships, salespeople talk about value-added services and incremental value has become a buzz term.

But what does value really mean? Can you see it? Can you touch it? Does it really hold water? How do you show value? The key is held in three letters, R – O – I. If you can speak the language of return on investment, you can speak convincingly to anyone.

Look back and forward

The first step is to gain understanding in three areas: market, solution and customer. In your markets, what are the keys metrics, influencers and value generators? How does your solution impact those factors from an industry-wide perspective? And finally, how, given that environment, does this help - in a real, even mathematical sense - your customer? The plan is to provide a solution that addresses issues and improves them in a manner greater than the cost of the solution.

Getting started

To begin, we must quantify the key cost areas for our customers. Most industries have opportunities for improvement in two basic areas, productivity and materials. These are excellent places to start, but use your imagination and find to draw from that as well, to make an ROI argument. Look to all areas of company expenditure, including reports, vendor input and other sources of information.

The Exercise

Begin by listing the costs, direct and indirect, that affect your customer, within the broadest definition of your impact. You may want to do something as simple as having a brainstorming session with your sales team to identify these costs. In our industry, they can be things like electronic tools, time keeping and labor-related devices, storage and space utilization. Leave no stone unturned.

From there, you start to build your model. Compile all these related items into a spreadsheet, with the item and the expected impact. Your spreadsheet will list and total these costs and the expected reductions, based upon a percentage improvement or change your solution will bring. Have an analyst, or someone good with Excel, create the formulas that do the calculations once the data is input, based on customer meetings, so that the model tells you the cumulative costs to the customer total in these areas and the relative improvement expected. Then you add in the costs of your solutions, monthly and up front. The net savings over time starts to bring you to your ROI. This can then be represented in an internal rate of return, or simple payback in months. Also, the total savings over a multi-year contract term can be very compelling.

For example, in security a remotely monitored video solution may cost $10,000 down and $600 per month. If I can save the customer, in patrol costs, false alarm fines for unverified dispatch and travel costs for supervisory “look-in,” at $1,500 per month, the customer has a solution that pays off in 12 months and creates a net savings of over $40,000 in five years.

The Presentation

Now, as you sit in front of your customer, you have a template, often used in conjunction with a needs assessment, to guide the conversation to a beneficial conclusion. Know where your break-even point is and work toward it. Whenever possible, be conservative on what your improvement will be. The customer will buy in more completely to the model’s results, and the sale will be easier.

Finally, when you return with the results, review each step. More often than not, if you’ve done the steps well, the results will excite your customer, compelling them to sign.

Robert Ricucci is president and chief executive officer of Protection Service Industries of California. He can be reached via e-mail at rricucci@psisecure.com.