mikedewitt.net

Have you ever come up with a great idea and pitched it to customers and/or investors, only to have your financial justification picked apart like a carcass on the savanna?

Me, too!

And worse yet, if I was pitching to a group of people, they would each attack different assumptions or, worse, they would propose conflicting values for the same variable!

And sometimes, what I was proposing was unprecedented, and no one could really say what the right numbers were.

This problem vexed me for years, until I came up with the perfect solution! Want to know what it is?

What I am about to tell you is a multimillion dollar secret!

How do I know that?

Because the first time I used it, my client decided to spend four times their entire IT budget on a single project, when I offered two lower-cost alternatives to them.

So I tried it again on something smaller, and that client loved it.

I tried it on entire business plans, too. In each case, the client thanked me for giving them insight where there had only been rancor. (okay, rancor may be a bit of an exaggeration).

So here is one of the most valuable lessons (in dollar terms) I’ve ever learned.

The human brain is the most sophisticated pattern matcher and synthesizer ever created, but it’s not perfect. I can’t simply state a point of fact and know for certain that you will internalize it, even if I believe with all my heart and soul and have mountains of data to back it up. You will only believe the new fact to the extent that you can rationalize it with the entire set of existing beliefs/patterns in your head. [As proof, did you take that last sentence on faith to be true? Did you question it? But I digress…]

My ROI problem was an example of this phenomenon. I would present a perfectly rational model of the economics of a new system - one that I had internalized while creating it - and expect the customer to immediately “get it”. Their natural reaction was to poke at it based on their prior experience, which usually included unrealistic ROI scenarios. Can you guess the solution yet?

Let’s take a concrete example. A friend of mine wanted to get approval for a project to improve the usability of usability-savings-calculatorsome IT applications. How do you justify a project like that? By calculating the cost savings of the improved productivity. (Normally I’d prefer something more tangible, but this is a simple example) The number of effected employees is known, as is Accounting’s cost for the current tasks. But what about the improvement in productivity? No matter what number you pick, somebody is going to have a problem with it, even if you pick something way below the expected return.

The solution. Don’t pick one. Let your audience pick it. By building a simple model and letting them play with the assumptions, you provide a tool to help them internalize the dynamics of the decision. Here’s the one we built for our example:

[Note: These numbers are smaller than the real-world ones]

Now, in the presentation to the approvers, my friend could ask them what they thought the percentage should be, and let the audience see what effect changing that parameter had on the total return. Want to pick a pessimistic number? How about an optimistic one? In my experience, audiences invariably settle on a number bigger than the one I would have proposed if I had to give one number. But the real value of the tool is that it allows the group to interact and discuss scenarios and the internal assumptions they each have, and that interaction allows group members to internalize the ROI of the system.

The example is a very simple one. Typically there is more than one variable involved, but the concept scales nicely. The key is to have one page that shows the key variables/assumptions as well as the bottom line effect. This allows people to immediately see the effects of changing the value of any variable. They see which ones have big effects and which ones have small effects. Each change helps them to build a new pattern of understanding of the ROI. Go ahead and try it yourself. The ability to see the effects of changing multiple variables is very illuminating.

Let’s try something a bit more complex: a generic revenue model for money management firms:

[Click on graphic to open spreadsheet]

You’ll notice that most of the work and calculations are not shown on the main page, but are accessible on the detail sheet. This allows someone to check under the hood if they like, but keeps the main page focused on the assumptions and their effects.


There are a few other nuances I’ve learned along the way, and those you will have to pay me for. But you can succeed brilliantly with what you already know. Give it a try; you’ll be glad you did!