Why Your Proposals Fail
Too often, salespeople fail to grasp the importance of the financial component in the sales process. They throw around the concept of Return of Investment (ROI) as if it is the ‘holy grail.’ Any sizeable project should include the financial justification for making that expenditure/investment. The proposal should be written as if a CIO will make the final decision.
The foolish simplicity of only focusing on ROI is that ROI is one of several factors (and not one of the highest priorities in financial decision-making) in determination of investing in your solution. Many salespeople do not grasp there are multiple competitors for budget dollars. It is not just direct competition. It is a competition for budget dollars. Proposals are lost to a different priority within the prospective company. How often does one hear we pushed this project off for the seeable future? This answer is code for we invested our money someplace else.
Please understand that you failed. You failed to make a financial argument that your proposal is a high priority for your customer.
“Moving forward, CIOs will finally have the opportunity to focus on the real meaning of their title — chief information officer,” Forbes stated. “The CIO figures out how to take the business forward in ways that extract the maximum value from the information on hand and tie in new sources of information to make better decisions, faster.” Does your proposal address the language of the CIO?
Your financial justification must include concepts like Internal Rate of Return (IRR), Net Present Value (NPV), and Payback in addition to ROI.
What is the yearly rate of return on that investment? If it is 10% but another totally related project is 20% on the same dollar investment what decision will the likely be made?
Wait! What is the present value of those dollars today vs. what those dollars may be worth 5 years from now?
Wait! How long will it take for our organization to see Payback of that investment?
Some definitions follow:
NPV and IRR are two discounted cash flow methods used for evaluating investments or capital projects.
NPV is the dollar amount difference between the present value of discounted cash inflows less outflows over a specific period of time. If a project's NPV is above zero, then it's considered to be financially worthwhile.
IRR estimates the profitability of potential investments using a percentage value rather than a dollar amount.
Each approach has its own distinct advantages and disadvantages.
Both IRR and NPV can be used to determine how desirable a project will be and whether it will add value to the company. While one uses a percentage, the other is expressed as a dollar figure.
The more commonly used NPV is found using a discounted cash flow model, and the net present value calculation discounts each cash flow separately, which makes it a more refined analysis than an IRR calculation. If rates of return vary over the life of the project, an NPV analysis can accommodate these changes. The NPV model also works better when the discount rate isn't known, and as long as a project's NPV is greater than zero, the project is considered financially viable.
Payback Period is the time taken for a project to pay for itself.
It is not too complicated. Educate yourself and/or educate your salesforce. Build financial justifications into your proposals as if they will be approved by the CIO. They very likely will be.
