Operations Research Management Science - Was It Something I Said?

<BODY bgcolor="#ffffff" link="cc0000" vlink="cc0000" text="#000000"> <img src="../cleardot.gif" width=1 height=1 vspace=4 border=0><br>   <table border=0 cellspacing=0 cellpadding=0 width=480><tr valign=top> <td width=10><img src="../cleardot.gif" width=1 height=1 hspace=4 border=0></td> <td width=470> <FONT face="verdana, arial, helvetica" SIZE=2><B><I><A HREF="../../ORMS.shtml" TARGET="_top">OR/MS Today</A> - February 2004</I></B></font><BR> <hr size="1"> <img src="cleardot.gif" width=1 height=1 vspace=4 border=0><br> <font face="times new roman, times"> <img src="../cleardot.gif" width=1 height=1 vspace=4 border=0><br> <FONT face="verdana, arial, helvetica" SIZE=2><B>Was It Something I Said?</B></FONT><br> <IMG SRC="../barbluehook.gif" WIDTH="468" HEIGHT="4"><br> <img src="../cleardot.gif" width=1 height=1 vspace=8 border=0><br> <FONT SIZE="+2"><B>Riled Up Over ROI</B></FONT><BR> <img src="../cleardot.gif" width=1 height=1 vspace=6 border=0><br> <FONT face="verdana, arial, helvetica" SIZE=2><B>By Vijay Mehrotra</B></FONT><br> <hr size="1"> <img src="../cleardot.gif" width=1 height=1 vspace=12 border=0><br>    So I just finished up a research paper and sent it off to <i>Interfaces</i> the other day. The paper describes some recent consulting work that I am extremely proud of. The definition of the problem, the development of the solution, and the organizational challenges associated with its implementation add up to a fascinating story. Our client, a senior executive at a software firm, was extremely pleased with what we delivered. There was absolutely no question from anyone in the company that this project eliminated several million dollars of expenditures. <P>Most of this paper was written well before Thanksgiving. Yet for the last two months I have managed to find all sorts of ways to postpone its completion, including final exams, consulting work, other research projects and our (long-delayed) honeymoon. <P>But here's the real reason that I struggled to get myself to sit down and bring this paper to closure: I needed to write the section that quantified the project's financial impact. While there were clearly plenty of tangible benefits, writing this section required me to lay out a return-on-investment (ROI) model. <P>And I have a huge amount of cynicism, an almost visceral hatred, for ROI models. <P>It began years ago when I was helping a client define a common set of business processes and CRM technologies for their call center operations. This was a complex undertaking, since these call centers were run in three separate cities for four different business units, and each of them suffered from the potentially fatal disease of Terminal Uniqueness, an affliction whose most common symptom is a propensity to say "our business is different" and "you guys just don't understand how we do things over here." <P>Our client was the vice president of Operations, and he had urged me to standardize the infrastructure as much as possible (Terminal Uniqueness, it turns out, is an expensive disease if left untreated). Most of my time and energy was poured into getting the right people from the different groups into the same room together - not only to make decisions, but also to challenge their professed "needs," to remind them of constraints on the availability of funding and IT support, and hold them to decisions that they themselves had already agreed to. <P>I was a full-time cat herder, and it was very frustrating. Individual managers, tacitly supported by their bosses, would often go around the process, leaving the rest of us to deal with whatever disruption they caused. <P>One day, I got an e-mail out of the blue saying that one group had gotten a demo from a Knowledge Management software vendor and that their salesman would be coming back in to see us that afternoon. <P>I was really angry: I'd been blindsided, it was too late to cancel the meeting without creating disproportionately large political waves, and Knowledge Management software was much further down our priority list. Not that it wasn't important for our project, but we did not have any processes set up for creating, approving, importing, exporting or managing Knowledge Base records. A meeting like this was nothing more than an irritating distraction, and we did not have time for it. <P>Dressed to kill, the vendor's sales team came storming into that conference room, flashing broad smiles, flipping business cards, pulling out their overhead projector and plugging in their laptop. After brief introductions, the lead account rep made a flashy 30-minute Powerpoint presentation about their company and product. <P>At the end of the show, the lights came up and they handed out a spiral bound booklet to each of us. The first page described how this proposal had been put together especially for my client's company "based on your business needs." The second page had detailed pricing for the software license, implementation services, and technical support and maintenance. <P>The third page was entitled ROI Model. There were all kinds of numbers, figures about costs to be deferred over several years (IT staff and infrastructure, telecomm, labor), inflated monetary values for projected customer satisfaction increases, net present value calculations with a dubious discount rate, and a payback period of just a few months. As the salesman continued his pitch, I tried to sort out the calculations and it was quickly apparent that this "model" was full of assumptions and omissions. Pure fiction. <P>"And so, looking at the ROI model on page 3, you can see that this deal is really a no-brainer for you guys," concluded the salesman. "And the sooner you close the deal, the sooner we can get you implemented so that you can start capturing those benefits!" This was not the first time that he had delivered that speech. <P>I do not really blame the salesman for this. It was the last week of his quarter, and he was trying to make his sales quota. But their ROI model was crap - I knew it, my clients knew it, and the sales guy knew that we knew it. We passed on his offer, even after he offered an additional discount if we signed up that day. <P>So perhaps you're thinking that I've thrown the baby out with the bathwater, that this first experience soured me on what is a very common and legitimate business valuation technique. But I'm not done yet. <P>We'll talk about this more next time. <BR> <img src="../cleardot.gif" width=1 height=1 vspace=4 border=0><br> <IMG SRC="../barbluehook.gif" WIDTH="468" HEIGHT="4"><br> <img src="../cleardot.gif" width=1 height=1 vspace=2 border=0><br> <FONT face="verdana, arial, helvetica" SIZE=2><I><B>Vijay Mehrotra</B> (<A HREF="mailto:drvijay@sfsu.edu">drvijay@sfsu.edu</A>) is a faculty member in the Decisions Sciences Group in the College of Business at San Francisco State University, and an operations management consultant.</i></font><BR>  <img src="../cleardot.gif" width=1 height=1 vspace=5 border=0><br>  <img src="../barblue.gif" width=468 height=1 border=0 alt=" "><br> <img src="../cleardot.gif" width=1 height=1 vspace=8 border=0><br> <font face="verdana, arial, helvetica" size="1"> <CENTER><script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script></CENTER><br> <img src="../cleardot.gif" width=1 height=1 vspace=8 border=0><br> <LI> <A HREF="tocfr.html" Target="_top"><I>Table of Contents</A><br> <img src="../cleardot.gif" width=1 height=1 vspace=4 border=0><br> <LI> <A HREF="../../ORMS.shtml" TARGET="_top"><I>OR/MS Today</I> Home Page</A><br>  <img src="../cleardot.gif" width=1 height=1 vspace=8 border=0><br> <img src="../barblue.gif" width=468 height=1 border=0 alt=" "><br> <b><i>OR/MS Today</i></b> copyright © 2004 by <A HREF="http://www.informs.org/" target="_new">the Institute for Operations Research and the Management Sciences</a>. 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