Let’s talk about soft returns in cost justifications for solutions that support technology-led engineering initiatives. Soft returns are ROI calculations that are based on productivity improvements. You can see a growing number of them today.
Why discuss soft returns? Chad Jackson shares his distaste for them, explaining that “you can’t really monetize them. If you go and talk with any financial officer, whether it’s a low level or a high level, and you say, hey, we’re going to be 20% more productive and you ask them and you tell them that, they’re going to turn around and ask you well, what does that mean for the company? Can we lower costs? Can we increase sales? Those are really the only two things that financial folks really, really care about. And when you compare, when you combine that with frankly, the risk of disruption associated with any initiative, that’s an uphill battle.”
Here are a few examples to elaborate on. Going down to the next level, let’s say that you figure out your engineering staff can be 20% more productive. So to monetize that, you go in one of two directions, you go with cost and you go with increased revenues. With costs, you monetize this by letting 20% of your workforce go and you will still be productive at the same level. No one wants to do that.
Engineering Executives are often not interested in that type of conversation at all.
The other way to increase your revenue involves a scenario where you have 20% more capacity in engineering allowing you to design 20% more products. That’s awesome, right? You can design better products, innovative products, and maybe you could explore more iterations and find new features that differentiate your products from the rest of the world.
The issue with this method is guaranteeing that you’re going to increase revenues. There must be buy-in from another executive leader in charge of sales. Suppose you propose that if the company is 20% more productive, they can create 20% more products. This executive leader is going to talk to the VP of sales and ask if they can sell 20% more? Often the sales department are given numbers that are already aggressive and would be on the edge of feeling uncomfortable in agreeing to those increased numbers. Asking for another 20% is not going to go over well.
The executive leader has no incentive to say yes. There are cases where a 20% increase is approved, though this happens rarely. Politically, this is a difficult position for executives. Talking about lowering costs and letting people go is not a popular solution, and talking about increasing revenue and getting a VP of sales to agree to hit a higher number is unlikely.
This is the context of soft returns and cost justification, a highly controversial subject that doesn’t seem to have an easy solution.
We will talk about hard returns with cost justifications in another video, an alternative to the method we just discussed.