Office Memo 4

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Office Memo 4

14 November 2002

Hard thinking about soft terminology

More[1] on ROI calculations

It is a curious thing in calculating the worth of any investment that the 'soft' side is the harder one to deal with, and to manage. It is the so-called hard side that is easier. The former involves uncertainty and demands thought, debate and judgment. By contrast, the latter is so straightforward and mechanistic that you can model it on any spreadsheet. This doesn't make it real or true, though, as we shall see.

The notion of 'hard' savings is tied in with the idea of their being 'tangible' . This term, used so often by investment analysts, depends on verbal sleight of hand. "Tangible" means capable of being touched, with a secondary meaning of being real or objective. The only output an IT system ordinarily produces that can literally be touched is paper from a printer and even that the computer didn't manufacture. We must instead be talking here about the other meaning. In other words, any reference to 'tangible' benefits contains the implication that these benefits have been objectively arrived at.

Here we move into an area of common misconception, perhaps unintentionally fostered. I refer to the idea that accounting systems are objective. They are not. They are like any other man-made system -- subjective, partial and constraining. Accounting relies on such subjectivities as goodwill, internal rates of return and depreciation levels. Also, its methods are all decided by the exercise of human judgement. Even the long-established conventions of the 'going concern' and historic-cost accounting are, in truth, polite fictions in which all companies collude.

There is nothing wrong in any of this. Accounting is, above all, a practical and adaptable discipline, on which the whole of Western business culture has been built. However, its widespread application has given rise to two widespread fallacies. The first, as mentioned, is the belief that, if something has been written up in a set of accounts, this thereby constitutes an objective statement about it. Such can be the case only for real spending, real income and real debts.

The second mistaken belief is that that entry says all that needs saying about a thing, whatever it may be, especially about its value. This implies that this value is universally valid, that it would be the same to anybody under any circumstances.

Both beliefs are wrong, as any ethically inclined accountant would confirm. Despite the earthbound image of their profession, the stock-in-trade of accountants is mainly the imaginary and the notional. Any numbers in a set of accounts that are not wholly derived from a real movement of money or value must involve the exercise of human judgement. Some examples of these are referred to above.

Return on investment calculations rely on these kinds of judgement. Items such as projected savings, the life-span of a system and the rate of human learning are all either guesses or hopes. They are thus neither real nor objective. And if they are neither of these, then they are, by definition, intangible.

If you don't believe me, just look at any ROI calculation. Mark those amounts that are based on hard, objective evidence, such as equipment costs, contractual obligations and salary outgoings. (Even that is not so easy -- does one weight salaries and by how much? Subjectivity is already creeping in.) How many entries are left? These will all have been subjectively arrived at to some extent. They are therefore intangible.

What this leaves us with is a situation where the so-called soft is difficult, the seemingly hard is decidedly squidgy and almost everything is intangible. Takes some getting used to, doesn't it?

Now, you may say that this is merely playing with words, it's "just semantics"[2]. It's certainly examining words but it is not playing with them. Words guide thinking and perceptions. They therefore influence decisions.

If the words used to describe the basis of an investment decision are false or inadequately explained, what chance does that decision have of being wise? If decision-makers explain their thinking, especially to themselves, in poorly thought-out terms, what chance have they of getting to the truth of the matter?

Whether truth is a welcome commodity in a particular situation or organization is another question, not for discussion here. What is for consideration is whether one should continue using the existing terminology of ROI investigations or whether one would get better results by using more honest language.

***

[1] See Office Memo 001 Return on investment (ROI) explored

[2] Semantics is the study of meaning. When communicating, we need to make clear to one another the meaning of the words we use. Either that or be sure they have a shared meaning that is unambiguously clear. How else can we use words to convey our intended meaning or meanings to one another in an effective manner? All human communication relies on this necessity, so calling it 'just' semantics is like saying that breathing is 'just' the use of the lungs.

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