"Marketing automation meets the capital budgeting wall", by Gordon S. Swartz and Rowland T. Moriarty. Marketing Management, 1992, Vol.1 Issue 3, p9, 12p, 7 charts.

Summary.

Often, marketing and sales productivity (MSP) systems must be approved by corporate capital budgeting committees using capital budgeting systems designed to handle manufacturing investments that ignore the many intangible and hard-to-quantify benefits of MSP systems. These overlooked benefits include increased revenues or market share, increases in the price the customer is willing to pay, improved marketing decision making, and improved coordination of marketing and sales programs.

However, avoiding the capital budgeting system by paying for partial solutions from the marketing operating budget can produce an ineffective or even a useless MSP system. Relying on another functional area’s budget is also often unsuccessful, because unless marketing and sales has control, the resultant MSP system may be inappropriate. Another scheme that marketing and sales may use to fund a marketing automation system is to implement a pilot project, which can be successful if planned and evaluated properly, but imperfections and implementation problems can leave lasting negative impressions. Nevertheless, these three alternative schemes for obtaining funding for MSP systems have proved more successful than the most common strategy, confronting the corporate capital budgeting process.

More than 90% of large US companies use quantitative tools like discounted cash flow (DCF) analysis to evaluate capital investments. Commonly, only benefits which can be quantified to many digits are considered. Also, inappropriately high discount rates are often used. The real cost of capital is about 8%, but the hurdle rate is usually about 15%. Since the investment proposal is often based on future prices and cash flows which do not take inflation into account, the error caused by the inappropriately high discount rate is compounded. An overly high hurdle rate distorts the calculated value of large projects, especially those with important but distant future benefits.

[It would seem to me that 15% is an appropriate hurdle rate because 15% is a typical ROI for the alternative investments (the investments which are competing for the funds); i.e., the real (after inflation) hurdle rate should be about 11%, given inflation of 4%. However, the hurdle rate should be different for different companies, industries, economic climates, etc. – I think it is common for a company to use a weighted average of its ROI of the last few years.]

Other errors of traditional investment evaluation include:

Adding more sales staff may be a profitable alternative to an MSP system. The benefit of additional sales should be considered carefully – new accounts are likely to produce smaller revenues per selling hour. Without appropriate support systems to handle these marginal accounts, higher marginal selling costs may decrease the company’s profitability.

Finally, rather than struggling to convert hard-to-quantify or intangible benefits into precise estimates, it is often better to weigh qualitative benefits against the NPV (net present value).