Value vs cost vs ROI – too difficult to handle?

ROI (Return on Investment) should, in theory, be an easy concept with which professionals can set a ‘fair’ price. ROI should also help establish the value of a piece of work and help align the interests of client and service provider.

In practice however there are many obstacles to using this approach. In some PSF sectors ROI is almost never applied.

Establishing the I, i.e. the investment cost is reasonably straight forward although there are some pitfalls. Should one just consider the fees being charged or should a client also include the internal costs of getting a project delivered? How should opportunity costs be treated? If a client’s management has to be involved significantly in terms of time (participating in a survey or training sessions) should their time be included in the overall cost of the project?

There are good reasons for and against various approaches to measuring the investment cost. In most cases the most important aspect is consistency of treatment so that a client can compare different proposals on as much of a like-for-like basis as possible.

Compared to the R part of the ROI equation determining the I looks simple. No matter how complicated fixing the I might seem, getting a reasonable view on the return of a PSF project can be a nightmare.


The Problem with ROI

Problems start with identifying the various streams of returns. Most PSF projects tend to have a large intangible component to them. Many on the other hand are totally intangible. For example, how do you value the benefits of an aesthetically more pleasing design for a building or a device? The answer would be along the lines that the building can achieve higher rents or a sale value or that more units of the device will be sold. The question however remains – how much more?

What about the improved confidence or quality of information that a training programme may result in? It becomes very difficult to assign hard numbers to such benefits. And even when a client would be willing to do so, how much of the benefit is due to the work or contribution of the professional and how much is due to the individuals at the client organisations willing or able to apply the newly learned approaches?

At this stage a rational conclusion may be that professionals should avoid ROI as a basis for setting a fee in all but the most exceptional circumstances. In the short run this may appear correct but it would be a major mistake to do so in the medium to long-term.

Unless professionals are willing to engage with their clients in a ROI discussion, no matter how flawed or imperfect – they will never be able to demonstrate true value added. Failure to do so will result in an inevitable drift to becoming commoditised and undervalued. Unless this dialogue is started it will never develop.

My advice in this case – put a well thought ROI proposal on the table and get the client to respond. The outcome may well surprise both sides.


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