Article #11:
Selling Your Document Management Strategy - Part Two

Previous Articles: Part One

 

Last column began a series on “selling” your document strategy and introduced the notion that in order gain support for your plan you must “speak the language” that will resonate with your prospective sponsors. One language you will certainly need to speak fluently is the language of “hard dollars and common sense.”

Unless the solutions and actions you have outlined in your document strategy are free of cost, you must provide clear justification for the expenditures associated with your plan and your recommendations must not be clouded by the technical miasma of marketing hype.

Decision-makers will want answers to questions like:

• How much will it cost?
• How much will we save?
• How long until we see a profit?

 

These may seem like simple questions, but providing a viable answer to accountants and executive decision-makers can be more difficult that it seems. In my book, “Designing a Document Strategy,” I discuss two tried-and-true financial vehicles that are commonly used to evaluate funding proposals and strategic products. They are Net Present Value (NPV) and Internal Rate of Return (IRR). Even if you don’t have the benefit of a graduate degree in finance or years of experience in accounting, you should be familiar with these concepts.

In many organizations if you do not include a formal financial analysis including NPV and IRR, your proposal will be rejected. Even if your company is more informal, using one or both in your write-up will show that you’ve done your homework and can justify the expense. One senior executive put it to me this way: "We evaluate all sizable funding proposals based on two things, return on investment and our priorities. Net Present Value and Internal Rate of Return analysis is the only quantifiable way to evaluate the financial impact of any project.”

 

Net Present Value

NPV can be defined as the future benefits and costs of your proposal converted into equivalent values today. This is done by assigning a dollar value to the benefits and costs associated with your plan, discounting those benefits and costs using an appropriate discount rate, and subtracting the sum total of discounted costs from the sum total of discounted benefits.

That explanation sounds complicated for a very good reason: It is. Think of NPV as simply today’s dollar value of all the future costs and benefits of your project…taking into account your “opportunity cost.” Cost of capital, or opportunity cost, sounds complex, but it is simply a measure (in percentage) of what your company forgoes when it chooses to do something. When evaluating your request, your management must consider a variety of other opportunities. Your proposal competes not only with other projects on the docket, but many other courses of action available – including doing nothing.

 

Internal Rate of Return

IRR is the percentage discount rate that, if applied to your project's future cash flows (positive and negative), returns a NPV of $0. As a rule, a positive NPV (greater than $0) indicates that your project is of economic benefit and should be pursued. If your project has a negative NPV, it does not provide sufficient positive cash flow to cover the expense of the project as well as your organization's opportunity cost. In this event, it is unlikely that your proposal will be accepted.

If your organization uses 10% cost of capital for project evaluation (a fairly standard percentage), proposals with an IRR above 10% would be pursued. One way to look at IRR is to consider that your organization’s Wall Street investments will likely gain 10% or more. If your IRR is below 10%, it would be more profitable to leave the money in the bank.

NPV and IRR give us a strong financial “language,” but gaining support and sponsorship for your document management solution isn’t always just about the numbers. Stay tuned for the next column in this series where we’ll explore other ways to justify your document strategy and build buy-in and support for your plan.

Check out the ACOM archives for prior columns by this author.

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Next Article: Part Three

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