Most ROI Calculators Are A Sham: 3 Red Flags To Look For
By John Schriefer and Marjorie Loresch, Lucas Systems
Technology buyers should be skeptical of vendor ROI claims. The same goes for online ROI calculators that purport to show how a new solution can pay for itself in the time it takes to read this blog. Skepticism is warranted, but there is real value in tools that can help you realistically estimate how a given technology or solution can impact your operations and improve your financial results.
With that in mind, here are three red flags indicating that a vendor's "ROI calculator" is a sham.
1) Faulty Math
You'd be surprised how many ROI calculators out there equate percentage gains in productivity with percentage decreases in labor costs/requirements – for example, that a 15% increase in productivity results in a 15% reduction in labor costs. That’s just not correct.
Here's a simple way to check the math:
If you insert a 100% productivity gain into an accurate calculator, you should see a 50% decrease in labor costs (NOT a 100% decrease in labor). This makes sense, because essentially you're saying that your team will be able to do twice as much work in the same amount of time. If workers can do twice as much, you need half as many of them. It all adds up.
If you insert a 100% productivity gain into a faulty calculator, it may indicate that you will reduce 100% of your labor costs, which is obviously not right – you’re still going to need some people to pick products. Next, insert more than 100 for your productivity gain and your calculator will suggest that you will need negative labor hours (whatever that is!) to complete the same amount of work. Seems like a sweet deal, but it's literally too good to be true!
The error is less noticeable on smaller percentages, but it's still there, overstating the effect of productivity gains on your labor costs.
2) Overly Broad Savings Assumptions
Unfortunately, many ROI calculators suggest productivity or accuracy improvements without giving you a way to assess the range of benefits you would see in your operation. In some cases, they hard-code an expected outcome (e.g., future accuracy rate) into the calculator, assuming the result will be the same across all processes and operations.
In other cases, the calculator may give a wide range of possible improvement (e.g., 10-100% picking productivity gains) without providing context for what would cause you to fall on the high or low end of that range, or how exactly the technology will help you achieve those improvements.
A useful calculator will provide some guidance for you to estimate your improvements and allow you to adjust the input to the calculator to reflect your situation.
At the end of the day, a simple calculator will not be able to provide a detailed, operation-specific improvement estimate. That requires a much deeper dive into your process and current state. But some calculators do provide a good starting point for understanding where your gains will come from and how to make reasonable estimates of potential improvements.
3) Calculating ROI Without Cost
The definition of Return on Investment (ROI) is the amount of the return or net benefit of an investment relative to the investment cost. Although cost is a necessary input to a true ROI calculation, many vendors' "ROI calculators" don't mention cost at all.
It’s not uncommon for providers of complex technology solutions not to include solution costs on their website, so it’s not surprising that many so-called ROI calculators fail to include solution cost. But it’s simply misleading to call a calculator without cost inputs an ROI Calculator. Without cost, what you are really calculating is potential benefit or savings – assuming the math is right and you can adjust the inputs based on your circumstances.
A Final Word
Estimating benefits is a key step in making the case for any new technology investment, so tools that can help you do that have real value. Simple online savings calculators can get you started, especially if they illuminate specific ways a given solution or technology will impact your results. Armed with credible savings estimates, you can make a decision whether or not to move forward with a given solution or vendor.
But beware of vendor “ROI Calculators” that don’t really calculate ROI, use faulty math to project savings, or are based on unsupported savings assumptions. Vendors that make these obvious errors aren’t really helping you build a business case. And they are reinforcing the notion that buyers should take all vendors’ savings and ROI claims with a very large grain of salt.
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