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When the ROI on Software Equals BS

Posted by Colin Kingsbury

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Feb 28, 2007 2:47:00 AM

There's currently a thread on ERE asking how one goes about calculating the ROI on an ATS. You can replace "ATS" with any other business software acronym here and it's the same story pretty much: we can help you shave a nickel off every $5 bill that passes by, and at the end of the year you'll have this jar full of nickels.

Perhaps the best put-down of this I ever received was some years back when I was an SE presenting a knowledge management product to a leading manufacturer of power-generation equipment that would have helped their techs find answers and relavant documentation much faster than they could currently. They had about 8,000 techs, so these were big numbers we could work with. We ran tests that showed techs spent an hour or so looking things up each day, and with our system, they could find the same info in 30 minutes or less. Multiple .5 hours times 8000 people times $50 per hour cost and we could show a positive ROI in one day.

The decision-maker never argued with our basic assumptions. He just said, "So they save 20 or 30 minutes? They'll just take an extra cigarette break." Far from being flippant, the VP was making a really important point. You can definitely get the pennies and nickels out of the process, but they have a habit of disappearing on their way to the jar.

ROI analyses work well when the dynamics of the system are very well known. For instance, the ROI on replacing a dirt-cheap inkjet printer with even a moderately-expensive laser printer is a no-brainer if you do much printing, because the laser doesn't guzzle ink that costs more than first-growth Burgundy by volume. You can easily plot a graph that shows that after X pages, the laser will be putting money back in your pocket. The variables are easily identified and quantified.

Looking at the ATS business, there is a major gap between cost and value. We charge $1200 per year per recruiter using our product, and we know from our clients that the vast majority of users spend nearly their entire working day staring at our system. Many of those users will cost $100k or more in salary and benefits, and they use our system because it makes them vastly more productive. How do we know? Because not a single client whose subscription was up for renewal has ever cancelled because "we realized we really don't need an ATS after all." A huge chunk of our business comes when a new head of recruiting or HR joins a company that doesn't have an ATS and says, "you gotta be kidding me!"

How do you quantify that value? Time-to-hire may not be good because the time saved by the ATS may accrue to recruiters spending more time sourcing or screening, to give just one example. There are a lot of moving parts, but I think it's safe to say that if ATS's were as anti-productive as they are often made out to be, there wouldn't be such a strong market for them that a company like HRMDirect could add 70 clients in the past 12 months without spending Jobsterbucks on marketing. But because we can't pin the numbers down the way we can an inkjet-vs-laser, we end up charging what the buyers are able to pay. CRM systems, which in many cases provide a similar set of functionality to our ATS, often sell for much more. Why? Because they're often bought by sales departments, which have far better access to budget.

In my experience, the sort of ROI analysis attached to most software buying decisions is made after the vendor has been selected, which is to say after it really matters. More often than not, the analytical model used to calculate the ROI was provided by said vendor, and is about as objective as asking a Red Sox fan what she thinks of this year's Yankees. But then, most buyers are by this point in cahoots with the vendor, and care about the ROI case only to the degree that it provides posterior insurance should the decision prove unwise*.

And to be entirely fair to all involved, often this is just a case of the buyer complying with internal bureaucracy. I wonder sometimes whether the finance departments that ask for this stuff really look over it carefully each year, or whether everyone except the shareholders is in on the joke.

All of this isn't by any means to say that thinking about things in terms of ROI is fundamentally misguided. But the systems by which we approach this today are for the most part barely nicking the surface of what's really going on. What I do know is that once a recruiter starts using a tool likeResume Direct, it becomes an indispensable if unglamorous part of their job, for less than most of them spend at Starbucks on their way into the office. Maybe our applicant tracking system is really that much better, or maybe people just like to complain, but I don't think I'm hallucinating.

If there's any good news in all this, it's that I'm being asked to provide these sorts of ROI studies far less often than 2 or 5 years ago. The once-ubiquitous "ROI calculators" (which are about as serious a forecasting tool as a magic 8-ball) no longer occupy prime billing on vendor websites. I'll take progress where I can get it.

* And therein lies my next post, which will be about ROI's evil degenerate twin, the dreaded RFI.