With ROI, Time is Money…Sometimes

I’ve developed a number of ROI models for companies seeking ways to demonstrate how their technology product will pay for itself 2, 5, 10 times over based on the cost savings, incremental revenue, etc. expected from using their product.

Nearly every time I’ve developed one of these models for clinical research software products, I’ve been asked or questioned about including some version of the opportunity cost of lost prescription drug sales from delays in trials. And why not? The numbers get large and juicy very quickly- a recent estimate suggests $500k per day! Use my product, reduce your clinical trials by 2 months, and you’ll generate an extra $30m in future sales!

I always say no, because drug development is a low probability business. ~10-15% of drugs that enter Phase I ultimately get approved (years into the future), ~30-35% that enter Phase II get approved, and perhaps ~60% that enter Phase III get approved (source ).

Dollar based ROI estimated must be tangible, probable, and reasonably within the customer or product’s control to realize. Future prescription sales certainly feels tangible, but only in the unlikely event the drug under development is approved, and that approval is not within the customer’s control (and definitely not within the product’s control).

Telling the customer your product is worth buying because they MIGHT achieve more sales years in the future IF a regulator they don’t control approves that product comes off as desperate, disingenuous, and just plain salesy. In my first ROI modeling project, I spoke to ~10 people in my client’s customer segment, and snuck in this concept to gauge whether there was any appetite for believing this type of ROI. Every response was strongly negative, and I quickly pivoted away.

So How Can You Quantify ROI for Time Savings?

Time savings still matter and can generate tremendous ROI. Here are a few ways I look at time savings and in an ROI framework:

• Customers who outsource parts of their operations often incur significant duration-based “carrying costs” with those vendors, and those costs often scale with time. In clinical research, these carrying costs are enormous, tangible, and 100% probable (believe me, I used to be the one sending the change orders).
• Customers may employ numerous internal contractors, consultants, and even employee roles who tenure is tied to completing projects or achieving milestones. Completing projects and achieving milestones faster means the organization can flex down those costs sooner than planned.
• Projects often involve require software products, and software is commonly paid for on a duration basis (especially in clinical research). If your product helps a customer finish projects more quickly, they will spend less on technology costs.
• If your product reduces the time (hours) to complete tasks, you can quantify that savings, especially if there are hourly-based people involved.

Each item above is quantifiable in an ROI model. You can't achieve exact precision- and the customer wouldn't believe you if you somehow did- but through internal and external benchmarks, and simply asking your customers, you can find reasonably ranged estimates that will help customers think about how using your product will benefit them financially over time.

I emphasize ranged estimates because 1) you won’t achieve perfect precision with these estimates, and 2) you don’t want to find yourself negotiating an ROI estimate. Using a high/low set of ranges creates a collaborative discussion with the customer, where they feel free to say “I actually think your 2-3 months should be 1-3”, or “that 40%-50% reduction is probably 30%-40%”. Instead of pushing back, you can simply say “ok” and adjust the ranges. The result is not a binary “$1,356,238” in theoretical ROI but “$1.2-$1.8m” with appropriate supporting assumptions that you and your client counterpart can use to further discuss your product across their organization.

Bottom Line

Use time wisely in ROI modeling. Keep it tangible, probable, and reasonably estimated. Be creative and persistent in exploring all materials sources of ROI from saving time. Avoid theoretical future benefits based on approvals or milestones that are outside their control and well-known to be significantly less than 100% guaranteed. Don’t give the appearance of exact precision when it doesn’t exist. Enjoy the process and let me know your own best practices.

I specialize in pricing strategies for service and technology providers. Contact me to discuss solutions for your organization.