R0ML’s Ratio

My father, also known as “R0ML” once described a methodology for evaluating volume purchases that I think needs to be more popular.

If you are a hardcore fan, you might know that he has already described this concept publicly in a talk at OSCON in 2005, among other places, but it has never found its way to the public Internet, so I’m giving it a home here, and in the process, appropriating some of his words.¹

Let’s say you’re running a circus. The circus has many clowns. Ten thousand clowns, to be precise. They require bright red clown noses. Therefore, you must acquire a significant volume of clown noses. An enterprise licensing agreement for clown noses, if you will.

If the nose plays, it can really make the act. In order to make sure you’re getting quality noses, you go with a quality vendor. You select a vendor who can supply noses for $100 each, at retail.

Do you want to buy retail? Ten thousand clowns, ten thousand noses, one hundred dollars: that’s a million bucks worth of noses, so it’s worth your while to get a good deal.

As a conscientious executive, you go to the golf course with your favorite clown accessories vendor and negotiate yourself a 50% discount, with a commitment to buy all ten thousand noses.

Is this a good deal? Should you take it?

To determine this, we will use an analytical tool called R0ML’s Ratio (RR).

The ratio has 2 terms:

1. the Full Undiscounted Retail List Price of Units Used (FURLPoUU), which can of course be computed by the individual retail list price of a single unit (in our case, $100) multiplied by the number of units used
2. the Total Price of the Entire Enterprise Volume Licensing Agreement (TPotEEVLA), which in our case is $500,000.

It is expressed as:

1

RR = TPotEEVLA / FURLPoUU

Crucially, you must be able to compute the number of units used in order to complete this ratio. If, as expected, every single clown wears their nose at least once during the period of the license agreement, then our Units Used is 10,000, our FURLPoUU is $1,000,000 and our TPotEEVLA is $500,000, which makes our RR 0.5.

Congratulations. If R0ML’s Ratio is less than 1, it’s a good deal. Proceed.

But… maybe the nose doesn’t play. Not every clown’s costume is an exact clone of the traditional, stereotypical image of a clown. Many are avant-garde. Perhaps this plentiful proboscis pledge was premature. Here, I must quote the originator of this theoretical framework directly:

What if the wheeze doesn’t please?

What if the schnozz gives some pause?

In other words: what if some clowns don’t wear their noses?

If we were to do this deal, and then ask around afterwards to find out that only 200 of our 10,000 clowns were to use their noses, then FURLPoUU comes out to 200 * $100, for a total of $20,000. In that scenario, RR is 25, which you may observe is substantially greater than 1.

If you do a deal where R0ML’s ratio is greater than 1, then you are the bozo.

I apologize if I have belabored this point. As R0ML expressed in the email we exchanged about this many years ago,

I do not mind if you blog about it — and I don't mind getting the credit — although one would think it would be obvious.

And yeah, one would think this would be obvious? But I have belabored it because many discounted enterprise volume purchasing agreements still fail the R0ML’s Ratio Bozo Test.²

In the case of clown noses, if you pay the discounted price, at least you get to keep the nose; maybe lightly-used clown noses have some resale value. But in software licensing or SaaS deals, once you’ve purchased the “discounted” software or service, once you have provisioned the “seats”, the money is gone, and if your employees don’t use it, then no value for your organization will ever result.

Measuring number of units used is very important. Without this number, you have no idea if you are a bozo or not.

It is often better to give your individual employees a corporate card and allow them to make arbitrary individual purchases of software licenses and SaaS tools, with minimal expense-reporting overhead; this will always keep R0ML’s Ratio at 1.0, and thus, you will never be a bozo.

It is always better to do that the first time you are purchasing a new software tool, because the first time making such a purchase you (almost by definition) have no information about “units used” yet. You have no idea — you cannot have any idea — if you are a bozo or not.

If you don’t know who the bozo is, it’s probably you.

Acknowledgments

Thank you for reading, and especially thank you to my patrons who are supporting my writing on this blog. Of course, extra thanks to dad for, like, having this idea and doing most of the work here beyond my transcription. If you like my dad’s ideas and you’d like to post more of them, or you’d like to support my various open-source endeavors, you can support my work as a sponsor!