Shared Services Planned ROI and Actual ROI

As a kid, I was very passionate observing the operations of Indian Bazaars.  For those of you unfamiliar with the term Bazaar, it is a dynamic market place, essentially a street full of shops where goods and services are traded.  It appears chaotic but it is organized in its own way.  Vendors organizing commodities, working from early hours of the day till late in the night with several tea breaks in between: driving up the blood pressures of their owners.  If you think Times Square is crowded, wait till you see the number of heads with buy/sell goals in Bazaars.  You can collect lot of data in Bazaars, goods flowing in and out, number of customers visiting, number of people employed:  a gold mine for people who love knowing more about the melting pot of various trades.  But one data point will be difficult to obtain: how much money did the vendor actually make?  There is no straight answer for this.  The vendors have an idea of how much money they want to make and if asked, will report this number- on occasion, you may be allowed the honor of seeing their cash box only to discover  that it often holds a lower amount than expected.

Despite a complete change of scenery, there are a lot of similarities between the bazaar scenario and Globalization, especially when it comes to Reporting and Tracking ROI.  Planned ROI and Actual ROI are two different things and very often they are used interchangeably.  So in shared services, if you outsource within US you can get 15% ROI and if it is off shored you can expect 30% to 40% ROI.  For a very long time, these were the numbers that were floating around (with minor variations).  The point of this blog is not to dispute the magnitude of the numbers.  But I think it is important to look at ROI in conjunction with assumptions. Otherwise there will be a huge gap between Planned ROI (what you think will be in the cash box) and Actual ROI (what is actually in the cash box)

Here are some best practices to minimize the gap between Planned ROI and Actual ROI

  • Communicate clearly what ROI is expected out of Globalization efforts.
  • Differentiate between First Year ROI and Ongoing (steady state) ROI to avoid confusion and set expectations.
  • Factor in all the costs (TCO- Total Cost of Ownership).  Do not leave out any costs required to make the ROI reach a particular target.  Call a spade a spade.
  • Document and communicate top 3 assumptions associated with the ROI (For example, you can state that in order to achieve 35% ROI, you have made the assumption that the implementation process will be completed in 6 weeks).
  • Clearly define what will happen if the assumption is not met, at least directionally.  For example, in the case above you can state that for every additional week delay in implementation process, the ROI for the 1st year will be lowered by 2%.  With little effort you can easily model such impacts (or you can call Zinnov and we love to help you with such modelingJ).
  • Define all the tracking and reporting mechanisms needed to capture actual ROI.
  • And finally, in the event that you deviate away from the goal, do not strike the panic button and state that Globalization does not work.  Conduct a Root Cause analysis and approach it like you would with any other problem.

So let’s review in simple terms:

Planned ROI – Actual ROI = Zero (you are doing as planned).

Planned ROI – Actual ROI = +ve (Not good. Conduct a rapid assessment to decipher what is going on. Often, you do not need consultants for this though we are happy to take your money and find the same problems you would have found anyways).

Planned ROI- Actual ROI = -ve ( You may be celebrating because you made more than you planned but it also reflects poorly on your planning.  You should call us because we can give you some good peer group “benchmarks”)

Now that brings me to my next blog topic.  What is a Benchmark?  Why do companies and consultants love it so much but yet don’t understand it well?  What are the uses and abuses of Benchmarks?  More on this next week.

Author:  VIjay Swaminathan, Co-Founder and Managing Principal

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