Why ROI isn't everything

BLOG: Quantifying value a new way

By: jtoonstra [at] ztr [dot] com (M)mroath [at] ztr [dot] com (artin Roath)

Product Marketing Manager, Industrial IoT Division

As with any investment, it makes sense to think about your return on investment (ROI). If you’re investing in telematics for a large fleet, it can require significant capital outlay and monthly services costs. But, when analyzing the investment, consider that the traditional model of measuring returns isn’t the only part of the equation. Recently I witnessed a situation where a customer was stuck on their analysis, focused strictly on a measurable return of uptime. Is it possible that some portion of the value is ‘gut feel’ – something that is simply felt, and intuitively perceived? It’s much like the value we experience through the daily use of our smartphones (but on a larger scale).

Quantifying value a new way

Typically, executive stakeholders want specific ROI numbers to help with their decision-making processes. Recently a prospective customer asked, “What’s the increase in my equipment utilization through telematics if I apply it to my fleet?”
From experience, I can say the industry consensus is that increased uptime is a known and real benefit, and this is obviously a reasonable question. But, how can we quantify that benefit accurately without guessing, especially when many
elements can influence it?
 
Instead, let’s consider something called soft ROI, and let’s also substitute the word impact in place of return. As we contemplate digital strategies founded on people and processes, I’ve found that this shift in thinking can be helpful.
 

A utilization impact example

Consider the example below, where a customer is making a decision about whether they’ll install telematics devices on all 1000 machines in their fleet:
  • A starting point for IoT impact is to begin maintaining equipment leveraging accurate run hour data. They know that if they stay on top of schedules, there will be increased uptime across the fleet. But, how much?
  • The customer indicates they often lose machines on large jobsites. With the Internet of Things (IoT), accurate location data lets customers locate equipment faster each time they’re looking for it. They’ll no longer lose visibility, or waste valuable time searching for an idle piece of equipment. But, how many times does this happen in a year, and on how many jobsites is this a factor?
  • During a year, the customer has had many inconvenient equipment breakdowns. With telematics onboard, the service tech can drive to site prepared to fix a machine with the right data and parts in hand. This eliminates the need to make two service trips to the site, and things get up and running sooner. How often do we predict this scenario will happen?
  • Historically, some of the more complex Mobile Elevated Work Platforms (MEWPs) in the fleet experience some kind of operational issues. This has resulted in downtime and unneeded service trips. With telematics, these issues can be resolved remotely by engaging Original Equipment Manufacturer (OEM) telephone support personnel with the machine data, eliminating trips and downtime.
  • Often, staying on top of fueling equipment doesn’t always go as planned because the customer has no way to monitor. Now, with real-time fuel insights, they can get alerts on machines that are low, and refuel at optimal times so they never run dry.
  • Unfortunately, the fleet saw three catastrophic engine failures last year that weren’t covered under warranty, and operators ignored the warning signs. With intelligent machine data via IoT, the faults are now visible on dashboards and the warning signs for engine failures come automatically via alerts.

Considering all these variables, what numbers are soft/approximations (e.g. how often will this happen?), and what numbers are hard/facts (e.g. service trip costs). Across the entire fleet, what is the resulting percentage of uptime gain and quantifiable impact to the business? As you can see, the equation becomes quite interesting, and the answer is not black-and-white.

Discovery process alignment

As you go through discovery exercises that contemplate technology use and its cost, be sure to think in terms of impact. Get obsessed with the impact elements, and have a group of stakeholders align on the value. Have some fun imagining the estimated impacts in percentages or dollars to come up with reasonable predictions that make sense for your business. The total value equation will add up…but it’s the combination of the impact along with the hard and soft elements that paint the total picture. Don’t forget to consider the customer impact of creating new and better customer experiences that could result from the examples above. Not every element can be quantified…especially value and word of mouth, repeat business and loyalty.
 

Risk of pure ROI thought processes

I’ve observed that sticking to traditional ROI models is contrary to what the construction, rental and industrial equipment industry hopes for with speedier adoption and alignment on use of IoT technology across the value chain. I suggest that some of the technology adoption lag and long buying/decision cycles we see in the industry relate to the complexity of measuring ROI the traditional way.
 
That said, years ago I clearly remember Sam Hassan, our CEO and President asking, “Can you imagine a day when machines are NOT ‘connected?” No, I cannot! The good news is that the IoT technology gap for connected fleets is shrinking faster now. After guiding many customer journeys toward IoT adoption, I look forward to your thoughts about this. Please share in the comments!

Comments

Martin,

The question “What’s the increase in my equipment utilization through telematics if I apply it to my fleet?” is a question about how a company manages its assets. Whether to use an asset, or deploy an asset to a low activity job-site, is an operations decision. I think the better question, which you answer is, “What’s the increase in my equipment AVAILABILITY through telematics if I apply it to my fleet?” The revised question addresses the issue of "productivity of assets". The 'total cost of asset ownership' is a key variable in determining 'how productive an asset is in generating revenues and profits'. The other variable is time.

The "Return" in ROI is really determined by the sum of cost avoidance's and forgone revenue opportunities.
When working with various struggling construction companies, I have found that productivity was the key contributing factor to lost profits. I call it "Revenue Leakage" and this leads us to three paths of analysis. From a contractors perspective, 1) the equipment revenue opportunity foregone while dealing with unplanned down-time, 2) lost billable construction hours for contractors while dealing with unplanned down-time, and 3) from the developers perspective, the drag-along cost exposures created by construction delays in a project.

The analysis would include:
1) Equipment: Depending on the original cost of equipment, running costs can be quite high. If equipment is down for 8 hours, these hours are no longer billable. Just as impactful, these are 8 hours of lost billings that will never be recovered. In order to compensate for lost hours on job 1, the hours are removed from future billable jobs by that same amount. You cannot make up for lost time unless you extend your operating hours at extra costs.
2) Billable hours: In addition to equipment billing, any hours associated with the project relying on that equipment is lost. If you have an operator and 4 crew working at a site, equipment down-time can put all labour in idle mode. This means, there are an additional 40 hours (5 crew @ 8 hours) lost billing. We need to factor in that these 40 hours will be paid out in terms of wages payable plus any payroll related expenses.
3) Developer: This is perhaps the greatest risk. Equipment down time not only effects the job-site, it also impact the developers project. There are far more than the 5 crew members impacted by down-time. Other trades and deliveries are relying on timely completion of tasks in which delays will have additional financial impacts. This could result in reputational damage to the contractor and depending on the terms of contracts, penalties for missing milestones could add to contractor exposures.

So I believe it is possible to quantify the impacts of unplanned equipment downtime. You have outlined all the relevant items. Starting with the collection all equipment performance statistical data to identify key result / key success factors to be addressed. Then quantify these elements by applying a costed-process-mapping-based approach. 1) map out current potential process/conditions (include current statistical data), 2) map out proactive management process/conditions (apply improved performance statistical data), 3) apply revenue and cost estimates to each map, and then 4) determine opportunities for improvement by subtracting #1 from #2. This will flush out the relevant cost and revenue drivers to work with.

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