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The Petaluma Valley from Sonoma Mountain.

ROI Does Not Apply

Return on investment isn’t a useful measure today.

ROI is an industrial age term, applicable to companies that manufacture things in factories. That era is now over. Even if a company manufactures things in factories, that process has become commoditized. When something is commoditized it means that it uniformly goes to market at the lowest possible price. Milk or wheat or nails are sold at essentially the lowest price possible. To sell a commodity for less means operating at a loss.

Commodities are often outsourced, like milk or wheat or nails. Or smartphone manufacturing or IT development. It’s possible for the price to go down, but then it goes down for everyone. That is, if you can get it cheaper in Bangalore, I can get it cheaper in Singapore.

This is not to say that you shouldn’t keep trying to make your atom-based business processes cheaper and more efficient, because if your competition does it and you don’t, then you are no longer a commodity and they are. Your sales will drop because your price will be higher than your competitor’s.

However, as business sage Peter Drucker said, there is no longer any way to differentiate one’s business doing better or cheaper or more efficient manufacturing.

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So, while ROI is still a useful tool for tracking manufacturing processes, it is quite useless in the world of tech product design, development, and deployment. This is because tech products are about innovation, about doing things in a new, and more desirable way. By definition, innovation means doing something new, something you have not done before. That means you will experiment, make mistakes, have failures, and learn by trial and error. It means that the first implementation will never be the most efficient implementation. Containing costs is antithetical to innovation.

There remain a lot of foolish young manager-wannabes, trained by older executives and academics who cut their teeth in the industrial age, who still use ROI in their work. But they are going to fail. They are going to lose to those who understand that solving problems and creating desirable products has far more leverage than lowering the costs of manufacturing.

In the industrial age, the bottom line was the most important thing in business. That is, the cost to make something overwhelmed every other aspect of that product. The best managers kept their costs down better than lesser managers. In the post-industrial age, the top line is the most important thing in business. That is, the desirability of your product overwhelms every other aspect of that product. If people want your iPhoneX, they will buy it regardless of the fact that they can buy a functionally equivalent Android phone for less. That is, the iPhoneX is not a commodity.

The cost of innovation is irrelevant if you can innovate. If you can’t come up with something new and desirable, then you’ve just wasted money. That is terrifying to an old-school, industrial-age manager. Keep that in mind as you debate ROI.

When a foolish manager applies ROI to a modern company, it translates into only two things: 1) Underpay the creative practitioners who might save the company, thus forcing them to go elsewhere, and B) Bludgeoning creative people with the demand, “Tell me the ROI of your design if you want it built.” They make this demand because they are in over their heads, scared, and it gives them a frisson of power.

One interesting way to counter that belligerent demand for an ROI calculation is to just turn the tables. Ask the asker how he calculates the ROI of everything else he does (It’s always a “he”). This will at least start a dialog over what is important.

Here’s a thing. It’s my new thing.

Written by

Ancestry Thinker, Software Alchemist, Regenerative Rancher

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