In real estate, we often hear clever marketing that touts how technology can benefit a building. While it’s often the case that technology has numerous perks, when it comes to investing in technology for your property, those benefits are usually measured one way: impact to profitability.
I don’t say this to be cynical; many of the things that lead to greater profitability, such as energy efficiency or automation, have positive external effects as well (e.g., a cleaner environment or less waste). The ultimate purpose of any financial investment, however, is to make money.
Yet when real estate owners and operators contemplate making major technology purchases, they often focus on conducting lengthy request-for-proposal (RFP) or other processes that don’t cover what I consider to be three of the most consequential questions:
1. Will your technology generate a positive return on investment (ROI)?
2. How quickly can I expect to see that ROI?
3. What data or proof points do you have that I will achieve the ROI?
1. Will your technology provide a positive return on investment (ROI)?
The answer should be an unequivocal yes. Any solution that doesn’t deliver a positive ROI won’t meet your needs — and most likely won’t be around very long. While this should be intuitive, and technology partners should provide a clear response, lack of specificity can cloud the answer by conflating two different types of ROI: hard and soft.
Hard-dollar ROI can be clearly defined and quantified. It represents direct, measurable savings or incremental revenue resulting from an investment. On the cost side, savings typically come from operational efficiency (automation), replacement cost (substituting a cheaper technology for a more expensive one) or cost avoidance (buying one technology at a lower cost to avoid buying multiple solutions that add up to a greater expense). On the revenue side, ROI comes from charging your customers (tenants) more for rent or additional services.
Soft-dollar ROI, on the other hand, is more complex and speculative. It takes time to realize or may not be realized at all. It is frequently tied to goals that may be affected by multiple variables and thus it can be harder to tease out the direct effect of a particular investment on an observed outcome.
Examples of soft-dollar ROI often relate to secondary goals such as engagement or retention. In the case of retention, if an owner observes a decrease in tenant turnover three years after purchasing tenant experience technology, how do they know if the decrease was due to technology, the overall economy or other factors that are difficult to separate? Of course, this isn’t to say that soft-dollar ROI isn’t real — only that it’s not easy to attribute the effect to the cause.
For this reason, the other two questions are critical.
If an owner invests in a technology for their building or portfolio and they expect to earn a positive ROI, they should have targets against which their investment is measured to ensure they are meeting their goals and truly understand where their performance improvements are coming from.
2. How quickly can I expect to see that ROI?
Timing is critical to understanding the opportunity cost of your return. A positive ROI that takes decades to achieve is likely not a great investment relative to other places you might invest your capital.
Having a timeline also serves as a reality check for the technology partner by effectively saying, “I hear you selling me the dream; when will I know the dream has come true?” Without clearly establishing this, a technology provider can always argue, “It just takes a little longer.”
3. What data or proof points do you have that I will achieve the ROI?
The purpose of this question is to ask the technology provider to explain how you can tell when you have achieved your goal. Not only is data relevant for creating a reasonable estimate of a future soft-dollar ROI, but establishing proof points enables you to recognize the milestones as they are achieved. In other words, you should ask, “What proof can you give me that what you’re saying to me is real?” Common proof points include case studies or testimonials.
The point of all this isn’t to say that hard-dollar ROI is necessarily better than soft-dollar ROI — it may not be. Hard-dollar ROI is always lower risk, though, because it’s bankable in the near term, whereas many things may have to go right to capture soft-dollar ROI, provided the opportunity to do so exists in the first place.
Too often property owners misperceive soft-dollar ROI as having the same risk as hard-dollar ROI. The best technologies offer both — an upfront return on technology dollars mitigates the risk, which allows you to pursue downstream soft-dollar ROI using “house money.”
Of course, using house money is one of the best ways to invest. By asking the right questions from the start, you can ensure you have the best chance of maximizing returns on your technology investments.
Source: Forbes
