Xperience

Calculating ROI: Financial Wizardry or Reasoned Thinking?

If ever there were a task most struggle with, it is ROI analysis. The stumbling block of many a business case, even the most financially literate may raise an eyebrow at their financial projections

But approach the process with a fair degree of rationality – plus a modicum of flexibility – and the forecasting of even the most widespread technology integrations can become that much simpler.

Identify Tangible Returns

The first step in any unclear process is to establish the levers that will determine success. Within many of our guides, we discuss the topic of productivity. But, what is productivity? It can mean different things to different people and businesses. So, what is important is how we measure it.

When it comes to business performance and productivity, measurements should boil down to exactly what we get done in a specific amount of time, or how much time we save on a number of identifiable activities. Then, when it comes to establishing the return, we can tally up these figures to make our calculations.

Here are some useful, tangible metrics to consider when considering your return:

Increased Customer Value

Average percentage increase in product margin/contract value thanks to improved customer communication/customer retention/contract renewal.

Reduced Overheads

X% fewer telephone queries averaging Y fewer minutes on the phone, saving £Z service overheads thanks to improved product operability/online communication.

Task Efficiencies

Time to complete payroll (or any task) reduced by X% thanks to streamlined processes and integrated services.

Reduced Operational Outages

No downtime resulting from system outages or routine maintenance ensuring 100% operability, decreasing lost sales by X% due to lack of access.

Travel Savings

Travel budget reduced by £X thanks to integrated systems improving interoffice communication. There is little value in abstract KPI’s such as:

  • Better user experience
  • Improved customer satisfaction
  • Live reporting capability

While they sound attractive on paper, unless you can actively measure their output, you should avoid focusing on such elements.

Reconcile Return Against Anticipated Costs

If you don’t know your costs, don’t even think about entering the Dragon’s Den. That much, we learn from television.

While establishing the return may require creative thinking, the costs can be more concrete. Evidently, there will be the cost of acquiring the software or repeatable subscription fees, which will play a large part in the overall investment. There will be additional estimations that feed into the purchase decision.

Severing ties

In some cases, you may find you need to sever ties with old software providers, which may present further costs. It’s therefore vital you understand the underlying complexity in decommissioning an existing system. There may be a contract you have to buy your way out of, or existing integrations may need to be severed for new systems to be built. Existing vendors may even be unwilling to share internal documentation that would facilitate the switch, increasing the expense.

Identifying these hidden costs is important as they will increase the visible spending and be a major factor in establishing the overall ROI.

Disruption

We all find change difficult, but the ability to manage it is necessary. As such you’ll need to ensure you factor in the potential for downtime, create a recovery plan and factor in the resources required to manage any anticipated business disruption.

Resources

Internal resources are the foundation for any successful project. Not only are they able to provide details for your project scope but they can also help manage any disruption. Further to this, you’re your project has been implemented, employees will require training, which again is going to cause a drain on resources and cost the business time and money. Understanding how much each employee is worth is a necessity.

Training

How are you going to show employees how to use the system? Will this be internally or externally managed, on-site or off-site, group sessions or by the team, and so on? This will be a major project cost to work out.

Bringing It All Together

Now to the hard part.

Keep the maths simple and calculate ROI as below:

(Gain on Investment – Cost of Investment) / (Cost of Investment)

The critical task is teasing out the underlying returns that reflect your business goals, as these will help you understand if you can achieve a meaningful return in your specific context. Even if the process reveals little, the most significant output may be a telling response to the question:

Do I really need this system?

If you cannot identify the returns to answer this, then perhaps you don’t need the technology after all.

Conversely, if you are hoping to reduce accounting overhead, and have worked out that you could save £100,000 in year-1 operational costs via a £50,000 investment in product, then:
Year-1 ROI = (£100,000 – £50,000) / (£50,000) = 100%

Which equals – decision made.

Measure Actual Performance

You can’t manage what you can’t measure.

The reality is, by tracking agreed KPI’s against the initial ROI forecast, you will maintain a healthy focus on what matters most to your business.

For example, if you adopted the system for the efficiencies it would create within your sales team under the assumption that customer conversion would increase as a result of improved transparency, then continually measure this metric to validate the return.

If you are disciplined in first coming up with performance metrics, then equally disciplined in reviewing on-going performance, the likelihood is that you have set yourself up for success even if the initial forecasts weren’t that accurate. Thinking ahead is time-consuming, but as with any great investment, the return should far outweigh the upfront expense, if properly thought through.

Equally, if something is headed in the wrong direction, it is vital you understand where in the process you slipped up—whether in the initial assumptions, tracking metrics, or integration strategy. Without feedback, there is no way the process can improve, or you can correct your course at a later stage.

Thankfully, the return on cloud-based systems is relatively straight-forward to estimate. Their subscription models mean that repeatable costs are easily understood.
Supported by industry-relevant case studies, your IT partner should be more than able to share an insight or two that helps you benchmark your performance against peers, strengthening (or weakening) your investment case.

In summary

Before starting any project, clearly identify what you want to achieve and focus on tangible business benefits to forecast the ROI (Remember to K.I.S.S). Clearly detail all hidden integration costs and use our simple equation to establish ROI.

Following this, it’s important to note down your ideal ROI. Is there a way to maximise this? If you cannot achieve your desired ROI, will this hold you back? If in doubt, speak to a software specialist who can review your findings and provide recommendations.

Whatever your decision, continuously measure productivity and ROI in every area of your business for you to make better-informed decisions in the future. For more information, contact us here.