I'm working towards my Master thesis with Design ROI as the focus. So , How can the value of design be proved by demonstrating the ROI?
I know design is used to differentiate and entice users and it would be invariably hard to pin down it's value but at the same would one be able to justify as to whether increased investment in design would generate increased profits ?
@Stefan : Thank You for the insight you have provided. With 3M being an innovative company focused on products based on consumer needs, the people perception is based on typological and semantic innovation of the product
When I say ROI for design, as you rightly pointed out it has numerous phases and I am looking towards the product design at market level as essentially it's from the market that one derives the necc feedback or performance would be my opinion. Although, please feel free to correct me. Assuming one can look into 'consumption centered design' in essence what 3M does, as a a KPI for ROI. Also since design plays a strategic role in a company like 3M.
Let me know your thoughts !
I assume that your thesis is looking at the ROI of Design from a business perspective, not from a design perspective. My response will be based on this assumption.
If you are looking at the ROI of Design from a business perspective the return part has to be consistent with what the business world expects. You have to talk in their language. This is one of Stefan’s excellent points. That generally means financial measures or close proxies for them. Loyalty, retention, engagement and whatnot are just proxies for financials measures. Unfortunately, the limited peripheral vision of business means the proposed designerly approach of changing the ROI measurement goalposts to measure something something even more intangible, e.g. trust, and in many cases, practivcally un-measurable, e.g. happiness, is a red herring. It is simply not going to work. If you present the proposed return of your design project to a hypothetical CFO and talk only about loyalty, retention and engagement without any reference to financials, the two large men outside his office will escort you out of the building. And with every right. You would have in effect said, “trust in me, even though I can’t show that what I am doing is worthwhile!”. So you can forget about this approach. It will not work. Period.
So what can you do? Luckily, all is not lost. There is a way you CAN use intangilble measures like loyalty, retention and engagement to make your (business) case. To do this you will have to construct a value-driver tree model that shows how the intangibles drive other measures and ultimately drive the financials. This article - http://www.exinfm.com/pdffiles/whba94.pdf - takes you through some of the fundamentals of creating value driver tree models (and the broader value based management). The hypothetical CFO will understand value driver tree models and will acknowledge the reduction in risk that your analysis has provided. CFOs don’t like unexplained risk.
And you can take it a step further. Ultimately, your in-market design WILL produce the financials that either prove or disprove your value drive tree model. If you are clever, and I know you are because you came here, you will design an iterative development process for your design in such a way that it validates as many of the assumptions and drivers in your value tree model, and provides numbers to plug into the model, a long time BEFORE the final design goes to market. Once it is in the market it is too late. The ROI Institute has a useful five-step model that describes how to do this. This article - http://media.roiinstitute.net/tools/2009/12/28/SCB.pdf - takes you through an employee retention case study from a bank. It should provide food for thought when thinking about other intangibles, like customer retention.
This general approach can also be used to look at what customers want, which touchpoints they use to get it, what resources they need to bring to the touchpoints, how the touchppoints join together into the longer customer journey and so on. But that is really another response to a different post.
So in a nutshell:
1. Think in the same language as your listener. If it is the CFO, it’s financials or proxies
2. Understand what levers your design pulls and how these influence financials through the value driver tree
3. Forget about moving the measurement goalposts. It will not work. Period
4. Design your project so that you can validate the value driver tree long before you get the design to the market.
Email me at graham(dot)hill(at)web(dot)de if you need more information. This is a lot easier than it sounds. I have used this approach on projects for over 15 years.
Forgive me, here a short anecdote:
This reminds me of my days at a large multinational, but originally dutch consumer brand (guess who), where Design was in the end also payed for by the CFO. Design was treated as an expense, rather then an investment, then. I assume this sort of environment is still pretty common, and is the one that Graham has on his mind when proposing value based selling etc. for getting the point across to the CFO - and with that improve the ROI of Design altogether. Talking financial language to financial people.
For years we (the designers in that company) tried to adopt VBS and other similar tools/methods to improve our standing and trying to make the CFO's 'get it'. We improved and made progress and finally old increase the spent on Design - but it remained just a spent…
Most CFO just didn't trust us designers and saw us as a cost, which had to be cut and kept under control: that's what most controllers do. No matter how good we could show, how with clever design solutions one could increase gross-margin, lower yield in production or increase customer loyalty and with that improve the overall financials - design remained a spent on the wrong side of the blanche sheet. A ROI on Design to most CFO's I met was given, if the design result could be achieved better, cheaper and quicker as the result within the previous financial year (AOP). Targets had to be met.
Therefore I agree that in order to treat Design as a serious business activity, it has to be clear HOW and with WHAT it drives the financials. I think Graham provided good insights and material to improve on this.
But for Design to move on to the good side of the balance sheet, you ALSO have to build trust. This is no different from any normal business with consumers. The financial ROI for a consumer is worse buying an Powerbook over buying a Dell - but to some consumers that doesn't matter. What matters is in what they trust. Funny to see how that knocks on the financials...
Oh, one day the CFO of my company then came into my office: he wanted to talk about the design 'budget'. I invited him to a beer along with some designer colleagues and we had a great evening.
"Guys, he said, I don't know what the hell you are doing all day long, but those new designs you have produced are delivering triple the margin the previous ones did. But that is not the point, you guys rock - I wished my controllers had so as much fire in them as you guys have!"
Finally he got it - and my budget tripled as well!
@Erik : Bang on :)... True moving design to the good and understandable side of the balance sheet is quite a task in itself and to ensure that the audience understand the reasoning behind it is , phew..
Indeed the CFO's are people who off course talk in financial terms, it's more like they can relate to the jingle of money(no offense or pun intended). Making them switch and listen over to the side of design would be quite a job. Personally, intertwining design and financial drivers for 3M is gonna be a long arduous task !!!
Thank you for sharing your anecdote.
Great anecdote and great point Jan-Erik. When you have proved your value (i.e. built trust), you're home safe. If there are uncertain/unmeasurable gains, people will be uncertain when they hire you. The key is to determine what creates value for your client and make sure that value is delivered. It sounds like management textbook fluff but if you can put in in practice and context, it's the key to a becoming a trusted advisor - regardless if your customers are executives or grocery shoppers.
How exactly do you measure 'value' for your client? Just curious... :-)
That depends much on the project. Sometimes there are strict financial targets that has to be met. I've also run projects with targets like "we have to find at least two companies to partner with out of the x you will be screening, meeting criteria y and z". Understanding what makes your client delighted is sometimes very hard, but it's also a difference between good and less good consultants/firms.
My point is that if your client has a target they have to meet and you don't deliver something that directly supports that target, I would say you have failed - unless your client says otherwise of course.
100% with you on that one. Value is entirely in the eye of the beholder.
The bigger challenge is achieving an acceptable trade-off between all the parties (actors) involved in creating value together. The CFO has one view of value, the designer has another, so does manufacturing, so does service and let's not forget the customer. Ultimately, it is the customer's perception of value that matters most.
It is all too easy to forget the bigger picture when we look at things through one particular perspective.
A great anecdote... But also very dangerous.
In it you are making an explicit positive relationship between good design (from the customers perspective) and sales margin growth. But what if some other factor unknown to the CFO was the real underlying reason for success. Like much better core functionality (in a newly designed package). Or swapping over to a more customer-centric reseller? Or applying behavioural economics to the proposition. Each one could just have plausibly produced the increase in sales margin growth. The anecdote is a classic case of the post hoc ergo propter hoc fallacy, whereby because you did A and B increased then it must have been A which caused the increase, when it could just as likely have been C, D or E which somebody else did. This is why we have and need split testing.
Trust is important. But it only comes with time, with repeated high performance and with a deeper understanding of what designers do. The challenge remains the same as before. To demonstrate unequivocally that good design (whatever that is) moves the financial needle, whether directly or indirectly. Ultimately, that is the basis of real trust. Not nice stories over a warm beer. (Although that is a great way to start).
With the risk of starting a purely academic discussion, how could you ever isolate "the underlying reason"? All success, whatever that means for someone, depends on numerous factors which you cannot possibly influence all by yourself. You can however do certain things to pave the way for success, which I think is exactly what Jan-Erik did.
As a side note, wouldn't split testing require you to identify all influencing factors and then testing for them? Often an impossible task I imagine unless you have oceans of time. The 80-20 rule would probably apply, but then you'd still risk missing "the underlying reason". The resource cost of being 100% certain is too high, that's why it's proven economical (from an evolutionary perspective) to be "certain enough". If you're dealing with things like space travel and nuclear power, "certain enough" might however require more work than if you're planning developer outsourcing.
Hmmm, let's steer clear of an academic debate. I would rather be approximately right than precisely wrong! :-)
You ask a very good question. Normally I would apply some kind of simple split testing with small numbers of variables, or even a multi-variate testing model backed up by appropriate annalysis of variance statistics with larger numbers. But as you quite rightly pointed out, business is not quite like the hard experimental sciences, it's not even like softer social science; you can never isolate all the confounding factors when planning your work. And business is often highly reluctant to invest in anything that isn't directly results related, even simple experiments to gather the evidence required to make much better decisions!
The most pragmatic way to progress that I have found is to break the work down into a series of steps and stages, each one tasked with taking the project forward, with developing valuable capabilities and critically, with finding out what you need to know to make an informed decision when you come to the next step. For smaller projects this means decision trees around the key decisions. For larger projects, I might even use real-options thinking to understand which business options might be interesting, the value of gathering additional information about them and the payoffs in better decisions if I do.
Business is too costly to base it on pure guesswork. Designers have some of the BEST innovation tools with which to create winning new products, services and experiences, but they often have some of the WORST decisioning tools with which to decide which ones are possible and which ones to actually create.
The only way forward is to be pragmatic. To use better decisioning in support of superior design. And to show unequivocally that good design creates tangible value. Nothing else is good enough.
Anecdotes are there to carry something across - but not to scare of, or? :-)
I think, the anecdote is not dangerous itself, but what I think it describes is dangerous: This true story for me re-captures almost 20 years of living in an environment of control craziness, where indeed business tried to be in control of everything and therefore could never trust things to be unclear, un-measurable, un-stable, unreliable… (that's why for instance they feared consumers most).
You are very right when you say that also other causes could have increased the gross-margin. I think, they all did. I am also pretty sure the company I worked for tested this, measured this and improved on the findings. Testing and finding out why is essential, but it's what you do with it, which makes the difference.
So don't get me wrong, I agree with testing, I tested a lot myself. But in my experience that alone does not make successful products or increases the going price on the long run (which is the best way to increase the margin, or?). It's the trust and confidence in what you do, and not in what you measure, which counts - and that's where Design is the biggest contributor: showing what can be done!
As soon as an organization understands that next to knowing (testing) it needs vision (trusting in what can be done) to create outstanding products and services, they win.
Let's have a beer over that!