Calculating Return on Investment of a Project

Identifying Tangible Returns

The first step in calculating the Return on Investment (ROI) of a project is to establish the factors that will determine success. Two key factors are business performance and productivity.

Here are some useful metrics to consider when considering your return on investment:

• Increased Customer Value (Business Performance): Average percentage increase in product margin/contract value thanks to improved customer communication/customer retention/contract renewal.
• Reduced Overheads (Productivity): X% fewer telephone queries averaging Y fewer minutes on the phone, saving £Z service overheads thanks to improved product operability / online communication.
• Task Efficiencies (Productivity): Time to complete payroll (or any task) reduced by X% thanks to streamlined processes and integrated services.
• Travel Savings (Productivity): Travel budget reduced by £X thanks to integrated systems improving inter-office communication.

In comparison, abstract KPIs such as better user experience, improved customer satisfaction, and live reporting capability add little value and are difficult to measure.

Understanding your Return on Investment Against Anticipated Costs

Before taking the first step to start your implementation, it is important you have a clear perspective of your costs. While establishing the return may require creative thinking, the costs can be more concrete. Evidently, the cost of acquiring the software or repeatable subscription fees will play a large part in the overall investment.

• Severing ties: In some cases, you may find you need to sever ties with old software providers, which may present further costs. It’s vital you understand the underlying complexity of decommissioning an existing system. There may be a contract that requires a fee to cancel the services. Existing vendors may even be unwilling to share information that would facilitate the switch. Identifying these hidden costs is important. These costs 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. 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 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. When your project has been implemented, employees will require training, which again is going cost the business time and money. It’s important to understand the cost of each employee’s time during project implementation.
• 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, in group sessions or by team? This will be a major project cost to work out.

Bringing it all Together

When calculating return on investment, keep the maths simple: (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. Even if the process reveals little, it may answer the following 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, then:

Year-1 ROI = (£100,000 – £50,000) / (£50,000) = 100%

Measuring Actual Performance

The reality is, that by tracking agreed KPIs against the initial ROI forecast, you will maintain a healthy focus on what matters most to your business. If you are both disciplined in first coming up with performance metrics, and disciplined in reviewing ongoing 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. Thankfully, the return on cloud-based systems is relatively straightforward to estimate as cloud subscription models mean that repeatable costs are easily understood.

Now you’ve learned how to calculate ROI of your project, but how else can you ensure your new systems project is a success?

Check out our ‘The Value Of Project Managers When Implementing A New System’ blog to find out.