Hey business-case builder, Total Economic Impact™ (TEI) consumer, and decision-maker extraordinaire! Thanks for tuning in. As you evaluate your purchasing options and build your business cases, we have a few tips that will help you better understand what a TEI is, how to use ROI figures, and how to talk about the “incrementality” of business impact.
1. ROI Alone Doesn’t Tell The Full Story Of A Technology Investment
Chances are that you’re considering investing in some sort of technology for your business. You might have found a Forrester TEI related to the vendors you’re evaluating. Before you make a decision based on which vendor has the highest ROI, please consider these three scenarios:
- In scenario one, you spend $100 to set up and run a lemonade stand in your yard for one day. Business is great, and you earn $300 — a 200% ROI with net benefits of $200 and a payback period of one day. Great work!
- In scenario two, you decide to launch a lemonade subscription business to your neighbors that you run for three years. The setup cost and initial marketing of the service is $10,000, your operating costs are $5,000 per year, and you earn $15,000 per year in revenue. Over three years, you’ve achieved a 66% ROI with net benefits of $20,000 and a payback period of 12 months. Again, great work!
- In scenario three, you launch a beverage truck business that you run for three years at an initial cost of $250,000 with an annual operating cost of $150,000. Business is, again, good, and you earn $300,000 in revenue per year — achieving a 20% ROI, net benefits of $200,000, and a payback period of 20 months.
All three investments turn out to be fruitful, but they’re dramatically different. The lemonade stand has the highest ROI at 200%; but you only earn a profit of $200, and it only happens over one day. Meanwhile, the subscription service has a lower ROI of 66%, but you’re making 100 times more profit than the lemonade stand. And finally, the beverage truck has the lowest ROI at 30%, but you’re earning another 10 times more money than the subscription service.
Clearly, these three investments should not be compared with one metric alone because the scale is substantially different. Keep this in mind when you’re reviewing any business value case study: The ROI doesn’t tell the whole story.
2. ROI Alone Cannot Be Compared Between Investments
If you compare the lemonade investment examples above only by ROI, you might conclude that the lemonade stand is the best investment. If you compare them with only net benefits or net present value (NPV), you might conclude that the beverage truck is the best investment. Looking at all available metrics, however, you realize that each investment has its merits and that the right one for you will depend entirely on the amount of capital you have access to and the amount of work you want to do.
While this lemonade stand exercise is make believe, this logic still applies to technology investments. A low-cost investment that affects a small team may have a very large ROI but a fairly small NPV. Meanwhile, a major business transformation might incur very large expenses upfront but yield immense long-term benefits that have a much lower ROI and a much higher NPV. The same considerations are true when comparing on-premises versus subscription or cloud consumption services, self-service open source versus managed services, and far beyond. With any investment, ROI alone is never adequate for evaluating the impact or comparing versus other options. While ROI shows the percent return above breakeven for an investment, it fails to measure scale or timeline. For this, you need metrics such as NPV, net benefits, or individual benefit cash flows, which show the magnitude of the financial impact to the business after recouping costs. ROI alone doesn’t tell the whole story when evaluating an investment, and further, ROI can never credibly be compared between investments without also comparing the purpose, scale, timeline, and business context of the multiple investment options.
3. TEI Studies Are Not A Competitive Evaluation
This might be surprising, but TEI studies are not built to be used for competitive analysis. Forrester already has something for that; you might have heard of our Forrester Wave™ evaluation. If TEI was to be a competitive analysis, the studies in question would need to hold all variables steady, except those impacted by the differing technology solutions. Since this is not the case, make sure you don’t assume that two studies can be compared apples to apples.
4. New Technologies Age And Saturate — TEI Measures The Incremental Impact
Monumental, history-making technology shifts such as the invention of the assembly line, the move from paper to computers, the explosion of the internet, the ubiquity of mobile phones and internet-of-things devices, and the automation of swaths of manual drudgery are less and less common. Instead, the technology landscape is now one of incremental improvements. As companies consider new investments, they are — to at least some extent — already “digital” in many ways. Every new investment is more intertwined with a complex web of other technologies to deliver unique, personalized outcomes for every use case.
As a result, most new investments in technologies and processes drive important incremental benefits but not the same scale of monumental ROI gains driven by these major first leaps. As the “addressable” potential for investments shrinks, the pace of productivity gains and other benefits such as customer experience and sales growth from most investments continues to slow as changes become more incremental and complex. While, certainly, many more foundational transformations are sure to come that we cannot yet imagine, most business cases are built to evaluate the many more incremental changes that occur along the way.
Consider Apple’s iPhone. When it was first released in 2007, it created a tremendous tidal wave of change. From the elimination of (nearly all) buttons to the finger-responsive touchscreen and continuous internet access, it shifted the paradigm of what we believed a phone to be. Compare that with today: Upgrading to an iPhone 13 does not shift our entire paradigm but adds incremental value by increasing speed and adding new features. Since you would never expect the ROI of the iPhone 1 and the iPhone 13 to be the same, we must look at business technology investments through the same lens of incrementality.
5. Forrester’s Continuous Improvements Raise TEI Credibility But Decrease ROI
The TEI methodology has been around for nearly 25 years, and Forrester’s highest priority is to strengthen the quality and credibility of our analyses. With every study, Forrester continues to learn more about investments in every technology, sector, and region — driving implementation of ever-better benchmarks, modeling approaches, and best practices.
TEI consultants activate these learnings by implementing process improvements, increasing modeling conservatism, standardizing modeling approaches, increasing depth to best practices, and continuously updating our understanding of vendors and the technology landscapes. The most obvious impact of this is that the ROIs of today are lower and more conservative than ever.
Now that you are armed to the teeth with some valuable knowledge of what a TEI is and what it isn’t, the importance of evaluating more than an ROI, and the language needed to explain the nuance of incremental technology investments, you can go forward with confidence that you have the know-how to make an informed decision on your technology investments.