No ROI? No Problem

I continue to be surprised by the confusion surrounding the term Return on Investment (ROI). The Wikipedia entry for Rate of Return treats ROI as a synonym, so it's a good place to go if you want to understand ROI as anyone who's taken introductory corporate finance understands it.

In its simplest form, ROI is a mechanism used to choose projects. For example, assume you have $1000 in assets to allocate to one of three projects, all of which have the same time period and risk.

1. Invest $1000. Project yields $900 (-10% ROI)


2. Invest $1000. Project yields $1000 (0% ROI)


3. Invest $1000. Project yields $1100 (10% ROI)

Clearly, the business should pursue project 3.

Businesspeople make decisions using this sort of mindset. I am no stranger to this world. Consider this example from my consulting past, where I have to choose which engagement to accept for the next week.

1. Spend $1000 on travel, meals, and other expenses. Project pays $900 (-10% ROI)


2. Spend $1000 on travel, meals, and other expenses. Project pays $1000 (0% ROI)


3. Spend $1000 on travel, meals, and other expenses. Project pays $1100 (10% ROI)

Obviously this is the same example as before, but using a real-world scenario.

The problem the "return on security investment" (ROSI) crowd has is they equate savings with return. The key principle to understand is that wealth preservation (saving) is not the same as wealth creation (return).

Assume I am required to obtain a license to perform consulting. If I buy the license before 1 January it costs $500. If I don't meet that deadline the license costs $1000. Therefore, if I buy the license before 1 January, I have avoided a $500 loss. I have not earned $500 as a result of this "project." I am not $500 richer. I essentially bought the license "on sale" compared to the post-1 January price.

Does this mean buying the license before 1 January is a dumb idea because I am not any richer? Of course not! It's a smart idea to avoid losses when the cost of avoiding that loss is equal to or less than the value of the asset being protected.

For example, what if I had to pay $600 to get a plane ticket from a far-away location to appear in person in my county to buy the license before 1 January? In that case, I should just pay the $1000 license fee later. For a $500 plane ticket, the outcome doesn't matter either way. For a $400 plane ticket, I should fly and appear in person. Again, in none of these situations am I actually richer. No wealth is being created, only preserved. There is no ROI, only potential savings.

What if I chose to avoid paying for a license altogether, hoping no one catches me? I've saved even more money -- $500 compared to the pre-1 January price, and $1000 compared to the post-1 January price. This is where the situation becomes more interesting, and this is where subjectivity usually enters the picture concerning expected outcomes.

Let's get back to ROI. The major problem the ROSI crowd has is they are trying to speak the language of their managers who select projects based on ROI. There is no problem with selecting projects based on ROI, if the project is a wealth creation project and not a wealth preservation project.

Security managers should be unafraid to avoid using the term ROI, and instead say "My project will cost $1,000 but save the company $10,000." Saving money / wealth preservation / loss avoidance is good.

Another problem most security managers will encounter is their inability to definitively say that their project will indeed save a certain amount of money. This is not the case for licensing deals, e.g., "Switching from Vendor X's SSL VPN to Vendor Y's SSL VPN will save $10,000" because the outcome is certain, breach of contract nonwithstanding. Certainty or even approximate probability is a huge hurdle for many security projects because of several factors:

1. Asset value is often undetermined; in some cases, assets themselves are not even inventoried


2. Vulnerabilities in assets are unknown, because new flaws are discovered every day


3. The threat cannot be properly assessed, because they are unpredictable and creative

As a result, risk assessment is largely guesswork. Guesswork means the savings can be just about anything the security manager chooses to report.

If you look at my older posts on return on security investment you'll see some more advice on how to make your case for security spending without using the term "ROI".

It should be clear by now that ROSI or security ROI is nothing more than warping a defined business term to get attention during budget meetings. I saw the exact same problem in the Air Force. At one point those who flew combat missions were called "operators." Once Information Operations came into vogue, that community wanted to be called "operators" too. At one point a directive came down that intel folks like me were now "operators," just like combat pilots. That lasted about 10 minutes, because suddenly the combat pilots started using the term "trigger-pullers." "Fine," they thought. "Call yourselves operators. We pull triggers." Back to square one.

The bottom line is that security saves money; it does not create money.