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Return on Investment fundamentals

Even with an economy that’s supposed to be loosening up, organisations must remain careful about how they spend their finite budgets. IT solutions – and software solutions in particular – afford organisations new ways to increase productivity and create new efficiencies, but before such undertakings can be made a key question must be answered: What’s the business case?

The proverbial business case is something that’s eluded many IT projects over the years. Keen on utilising the latest and greatest, organisations have looked to drive competitive advantage and productivity gains through sheer innovation and bravery. Now, when dollars are tighter and there’s perhaps more at stake, there’s a renewed focus on the value that is being derived from the project.

A fundamental part of any business case are the benefits, typically financial, which will be derived from implementing said IT solution. One established way of determining this is to use the classic “return on investment” analysis as a way of helping identify and measure the benefits that can be accrued.

Put simply, Return on Investment (ROI) analysis answers the question: “How much does my organisation get back compared to the amount invested?”

The amount that is recovered can be measured in pure financial terms as cost savings or as increases in revenues, margins or profits. The amount recovered can also be measured in non-financial terms as accomplishment of business objectives, such as improvements in speed or quality of operations, increases in customer satisfaction and loyalty, or increments in employee productivity and retention rates.

Obviously, some of these are easier to measure than others, but that’s to be expected. Any serious ROI undertaking needs to work through identifying the areas that could receive some benefit from an implementation, and then work through the best ways of measuring the benefits.

With the myriad solutions available, the return on investment must be calculated in different ways. The factors involved in calculating the ROI of a financial management system are different to those of an intranet or unified communications solution. But whilst they are different solutions, at the highest level they can – and should – introduce efficiencies and, ideally, cost savings, into an organisation once they’ve been implemented. When building the business case, it’s these efficiencies that need to be quantified.

What do I mean by that? Let’s look at a couple of examples.

Let’s say you’re looking at a solution to help improve document management in your organisation. What kind of questions should you be asking to understand the benefits this solution could provide?

Here’s one: How long does it take for an average information worker to find the correct information as it relates to a specific project?

If a staff member is looking in their emails sent items, their inbox, external websites, their local desktop and then a file share, it is safe to assume at least 20% of their day is spent looking for relevant documentation. With 100 employees making an average of $50,000 per year, you would have a payroll of $5 million annually. Therefore a 20% increase in efficiency yields one million dollars in returned productivity. Take a much lower number and the savings in productivity is still quite compelling. If all you saw was a 5% improvement, that would be equivalent to up to more than $250,000 in annual productivity gains.

Simple metrics, yes – but the principle is clear. And by understanding metrics like these, your organisation will be better placed to understand how it might benefit from implementing a document management system, which is designed to address these kinds of requirements.

In terms of a Unified Communications (UC) solution, the criteria are different. So here are some different kinds of considerations, around which questions could be asked:

  • Cost reductions. Where can savings be made by introducing unified communications? Can the cost of conference calls be reduced? What about travel costs?
  • Cost avoidance. Why call or visit when you can use instant messaging? Would this mean a reduction in costs?
  • Revenue and margin gains. Would UC and the efficiencies it introduces help organisations become more efficient? Would salespeople be able to sell more in the time they have available?
  • Indirect revenue benefits. UC could help you be more responsive to your customers’ needs. What’s the value of more loyal and satisfied customers?
  • Productivity improvements. Instant messaging and web conferencing results in more efficient employees and accelerated business processes. What value does this provide the organisation?

Regardless of how one asks these questions, the questions need to be asked. For anyone considering implementing solutions of any kind, in most situations it would surely be preferable for any decision-making to be based on tangible evidence, inasmuch as this can change.

And while there will always be exceptions, it’s becoming more common for any project to be considered in these terms. While this may seem obvious to most of us, it’s not the way the IT industry has traditionally worked, and is a sign of an increasing level of maturity as IT systems become even more critical for organisations of all types.

Vendors such as Intergen also have to think differently, and look to justify the value of our customers’ investments. Whilst we’re adept at the technology and implementing solutions to meet business needs, we also have to be cognisant of the reasons why these systems are being implemented in the first place.

ROI isn’t a new concept, nor is it an altogether attractive one with all the other distractions in the IT market. But it remains as relevant today as it ever has, and organisations – customers and vendors alike – must be reminded of its value. After all, if the solutions we use and implement don’t deliver value, what are we doing wrong?

Posted by: Tim Howell, Marketing Manager | 18 January 2010

Tags: Business Case, ROI

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