Overly Optimistic RFID ROI Expectations A Very Bad Sign

Written by Evan Schuman
February 11th, 2009

ABI Research on Monday (Feb. 9) reported that, according to its latest RFID user survey, 36.7 percent of respondents expect to see a clear return on investment (ROI) from their RFID efforts in “less than 12 months.” An additional 25 percent see 18 months as a better target.

Some 13.3 percent of respondents say 18 to 24 months, and only 6.7 percent assume it will take “more than 24 months.” The respondents who “do not know” account for the remaining 18.3 percent.

Those are some very sobering numbers. Do IT managers truly believe these goals, or have they convinced themselves to believe? Or were they forced to say what they really need to get their CFOs’ spending authorization and now need to be consistent? Even Wal-Mart’s Sam’s Club is struggling to quantify its own RFID ROI numbers.

Much of the asnwer depends on how picky they plan to be when defining ROI. Historically, RFID ROI is very slow to materialize except in very limited tests. It usually requires a lot of cooperation from supply chain partners, and those suppliers and distributors often have very different views about their own ROI needs. Then there are the retailers’ own managers, who need to start trusting RFID-generated data before the company can see any business benefit from it.

Please don’t get us wrong. RFID is a very exciting and profitable technology, with huge potential. But the very nature of it dictates a very long time to deploy it thoroughly enough for ROI to be realized. And the absolutely worst thing that can be done is to bring the technology into a project with unrealistically high expectations. Those “more than 24 month” people have a much better shot at seeing ROI because they won’t feel the need to abandon RFID when it doesn’t start paying for itself in nine or 10 or even 14 months.

The answer I would have gone with was an honest “do not know.” But CFOs don’t like IT execs who choose such “open-ended” options.

The ABI respondents included all flavors of RFID deployment in their payback scenarios: closed- and open-loop across a variety of applications and at various stages of trials, rollouts and fully deployed systems. The study itself looked at 185 organizations and was apparently conducted in mid-2008. ABI didn’t explain why it conducted research in mid-2008 but didn’t release its report until mid-February 2009.

Fascinating But Tricky To Understand

But the data is still fascinating. The surveyed cited “lack of adequate ROI data” as a top reason for not deploying RFID technology. The critical element is whether the referenced lack of ROI followed an internal trial or whether it prevented such a trial.

That’s a huge difference. If a company did an extensive, multi-year RFID trial and saw that it was clearly not working and showed no signs of working, that’s an airtight reason for not deploying. But if the retailer took its own—or some vendor’s—projection of ROI and found it wanting, that’s not an effective strategy. Every company is different when it comes to anything as integrated as RFID must be. Pre-trial guesses are pretty much worthless.

This ROI determination gets even trickier, though. Let’s assume it followed a trial and, taking another leap of faith, let’s assume the trial was extensive and lasted long enough to be fair and realistic. Much of the ROI of RFID is based on how much data is used throughout the enterprise. That’s why favorable RFID trials can yield much different results upon full deployment, both better and worse.

ABI Practice Director Michael Liard said another problem is that companies are very hesitant to share good experiences, which increases the ROI discovery time for everyone else. “One of the great problems in formulating useful ROI models and setting goals has been the reluctance of many end users to share what they have learned. It’s tough and has been holding parts of the industry back,” he said. “Somebody who’s getting great results with RFID is often understandably wary of letting competitors know how much more competitive it is making them. But if we want this market to move forward in a recession, we need to start talking about these things as proactively as we can.”

Liard said the weak economy is also playing a major role. “In times of economic slowdown, a quick positive return on investment is especially important to potential RFID users,” he said. “Some RFID projects are still moving forward, while others have been delayed by the recession or put on hold. The good thing is that we’re not hearing much about cancellations. That’s a positive sign.”

Yes, it is indeed a positive sign. But positive signs have a tendency to boost expectations, and recession-challenged executives often grasp at such hope. If they see RFID as a profit savior (maybe a prophet of savings?), they had better have the patience to give it time to perform its promised miracles.


2 Comments | Read Overly Optimistic RFID ROI Expectations A Very Bad Sign

  1. Chris Kapsambelis Says:

    What the IT managers are saying is that RFID does not work. If they come out and say that, they will be branded as RFID Skeptics, RFID Deniers, Shortsighted, etc.. Top management has bought into the RFID hype, which intimidates middle managers.

    How do you tell your boss he made a BIG mistake?

    You start off with “Please don’t get us wrong. RFID is a very exciting and profitable technology, with huge potential. But…”.

    Laird says “companies are very hesitant to share good experiences”. Ordinarily, you cannot stop people from trumpeting their successes. The reason they are not sharing experiences has more to do with the failure of their efforts, and not their success.

    How do you tell the boss you spent a million dollars on a pilot that failed?

  2. Luther Martin Says:

    I haven’t seen any cases where RFID makes a supply chain much more efficient than just good management by itself would have done. This means that you may be able to get almost all of the efficiency gain that RFID promises without actually using RFID!

    I would also be concerned about RFID causing the same sort of rigidity that using ERP software can cause. ERP software may work fine once you have it set up, but it can also be very expensive to change. When I worked for a Big 4 consulting firm, we loved ERP software. Would you care to guess why?


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