Having just wrapped up the last post in my series on selling technology to executives, I took one last look at what I wrote and realized that the proper cost accounting treatment I described in one passing sentence needed to be corrected. Checking in with my truly wonderful editor, Kristine, I learned that my final post had already gone to press. Rather than adding the insight to the original article, I decided it was the perfect opportunity to prove a key point in my series: when it comes to cost accounting, nothing is ever black and white and even “us finance guys” miss a digit once in a while (especially when trying to offer a simple explanation for what is truly a mathematically complex concept.)
In my last blog, I was talking about the proper cost accounting when a retailer’s WAN goes down and it sells products anyway, taking 100 percent of the risk for credit card fraud. In that post, I glossed over a key element of the ROI calculation when I said “the value of a WWAN solution could be calculated using the gross margin of each sale.” After re-reading that (once it went to press), I realized that I had “borrowed” the conclusion that the primary benefit of WWAN in a retail environment was incremental sales. But that wasn’t the key benefit of the second retail WWAN example—because the retailer in that question was going to sell the product anyway. In this case, the key benefit was fraud reduction. Whenever you eliminate fraud, you get to claim 100 percent of the fraud reduction toward your solution.
To understand why, just think of what happens when a purchase is being made with a stolen credit card. The retailer is out 100 percent of the revenue (the credit card company will credit the victim’s credit card account by charging it all back against the merchant) and the inventory (that big screen TV or whatever it was) has also walked out of the store and “it ain’t comin’ back.” The primary “benefit” of this WWAN solution is based on the extent to which these types of frauds are eliminated when the WAN is operational. On the aggregate, some of these frauds will happen even with credit card validation, so while you can’t count 100 percent of the gross revenue toward your ROI by eliminating these transactions, it’s going be a lot closer to gross revenue than it is gross margin (given that in the retail industry, gross margins get as low 3 percent for grocery stores and maybe 10-15 percent for “big box” retailers.)
In reality, the benefit of the WWAN solutions in the previous blogs are overly simplified, because the actual ROI could come from myriad sources that are too numerous to explain (mathematically) in a written article or series such as this. Suffice it to say, there are countless other examples, but in an ROI model, you try to choose the major factors and focus only on those.
My goal in this series was to try to simplify ROI, both so that IT strategists could calculate simple ROIs on their own as well as to understand how “finance folk” think so that IT strategists could collaborate with them. Of course, as I now submit this post clarifying the appropriate accounting treatment for the ROI calculation in my previous post, I am asking myself if I should first send it to my auditor before I send it to my editor.