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In my career as a finance executive, I have seen hundreds of technology presentations and whitepapers for software, hardware, services, and systems. Typically, after highlighting the key features, there is a cost/benefit comparison and a generic ROI demonstrating the value of their solution.
Return on Investment (ROI) is a standard justification for technology projects promising a favorable expected return. An ROI percentage is the return (value of the all the benefits) minus the investment (total cost of ownership) divided by the investment multiplied by 100. The common wisdom is the higher the ROI, the better.
Productivity is the name of the game. A technology solution delivering increased productivity with lower costs will produce a real ROI. To ensure the promised or expected benefits are achieved, one simple question I like to ask is, will this solution allow me to reduce headcount? The reduction of at least one employee resulting from a technology investment is both understandable and, more importantly, measurable. Reducing headcount is a reliable benefit measurement because salaries are typically the largest expense in most organizations. In addition, the practical application of productivity improvements is delivering higher output with fewer resources.
Typical ROI’s can be inflated with vague or potentially misleading concepts requiring more investigation. Evaluating technology investments can be challenging when some of the benefits are not easily understandable or measurable. The key to better ROI calculations is improving your assumption accuracy and excluding benefits that cannot be translated into dollars and cents. The accuracy of a project’s estimated benefits and costs can vary significantly with small changes in the assumptions used. Accurate estimates can be difficult when a new technology solution affects multiple parts of the organization, or it is a component of a larger project.
“The key to better ROI calculations is improving your assumption accuracy and excluding benefits that cannot be translated into dollars and cents”
Three concepts to investigate when re-evaluating technology ROIs:
1. Timing of Benefits: When benefits occur over a longer time horizon, the value of the benefits may diminish due to unforeseen events and circumstances. The return calculation should be lowered if long-term future benefits are not contractually guaranteed.
2. Non-Cash Benefits: Investigate non-cash benefits that may not actually generate any measurable financial returns. Shifting costs to another part of the organization is not a benefit if headcount cannot be eliminated in a reasonable time horizon. For example, saving time or streamlining operations to perform other functions or duties is not a quantifiable benefit if headcount cannot be eliminated in the short or immediate term. This is a questionable benefit because the operating expenses are not being decreased in a measurable way.
3. Labor Cost per Transaction: Investigate the benefit of a lower average employee cost per transaction. If the same number of employees exist after implementing a solution promising, lower average labor costs should be reviewed carefully. The benefit is only relevant if identifiable and measurable costs are eliminated from the organization. If not, the obvious question is: Where are the savings?
Generating incremental cash flow by increasing revenues or decreasing expenses is the primary reason for investing in technology. These are projects with ROIs that increase productivity, profitability, and shareholder value.