MN SolutionSpace is an occasional newsletter to keep you updated on MN Solutions. As well as highlighting what we do, I hope it may in a small way entertain, inform and provoke new thoughts.
Return on technology investment
It was a casual question posed at the end of a long client call about innovation. “Dr Naylor, you are the expert. What is a good return on technology investment?” I always feel simultaneously flattered and wary when I am described as the expert, especially in those cultures which revere experts and accept their opinions without question. I pondered for a few moments and answered “A factor of 5 to 10”.
The number came back to haunt me in a later call. Is it really that high, the client wants to know. “Well,” I said,” I’ve seen cases of 10-20 times ROI for real ground breaking technologies, but of course there are also incremental improvements from less dramatic technologies, so for those perhaps a factor of 5x”.
ROI
After the second call I decided it was time to do some research. Relatively few technology valuations are published, either because the numbers are regarded as proprietary, or perhaps because the returns in some cases are embarrassingly small. Technology returns are typically quoted as IRR or as ROI, the latter being PV value added – PV cost divided by PV cost. If one makes assumptions about the cashflow, one can convert ROI to IRR and vice versa.
It seems my estimate wasn’t too bad. A portfolio of oil & gas R&D yields an ROI of 5 to 9 on technologies. This means that successful technologies must return more than that – to pay for unsuccessful R&D and failed technology implementations. Oil & gas seems to deliver a better ROI than the big pharmaceutical companies achieve.
There are clearly a range of methodological questions in making these valuations – but we’ll save that for a later discussion.
Mike Naylor