Investing in technology is essential, any business that deprives its technology infrastructure of investment will soon find it difficult to compete in the market. That said, not every technology investment brings returns while projects can be very costly when they fail.
In a fast-moving technology world where the options for investment are limitless, picking the right projects can be challenging. Return on investment (ROI) is one measure by which to judge a project, but how does one go about calculating return on investment?
Defining ROI in the Context of Business Applications
The financial definition of return on investment is simply this: ( return – the cost of investment ) / (cost of investment). But when investing in business applications the gains and costs cannot always easily be boiled down to numbers, making ROI difficult to implement as a measure.
Clearly, some gains and costs can easily be worked out. Your new software application will have a price tag including licensing fees and implementations costs. Other costs and benefits can be difficult to calculate.
Is this a big project? What will happen if it fails catastrophically – can your business recover, and at what cost? On the flipside, if your business does not make the investment, is it at risk of getting eaten for lunch by its competition?
You may never get full, numerical clarity on the return on investment of a business application. But understanding which factors to look out for when evaluating ROI is a good starting point. Let’s take a look.
Thinking About the Costs
It’s important to keep in mind that the sums paid to a vendor are not where the costs of acquiring a business application begin and ends. Of course, these costs are the easiest to boil down to numbers, and you should plug these numbers into an Excel spreadsheet nonetheless.
However, you won’t get exact numbers for opportunity costs. In other words, what else could your staff have done with their time? There’s no real way to calculate the exact financial implications of your business adjusting to a new software package either, and these adjustments can be costly.
Finally, in working out the costs you should do a risk assessment and plan for extremes. If the project is delayed or experiences teething issues, how many customers will you lose? Could it lead to public embarrassment and a loss of brand value?
Consider the Benefits
Your new business application can bring enormous benefits, some of which will be easy to calculate. It may enable your company to launch a new product or service. Or, you could cut on expensive legacy maintenance costs. Also easy to calculate real numbers for are efficiency improvements: your new application could scrap a costly process, freeing up your staff to be more productive elsewhere.
Some benefits are less tangible but have a really big impact nonetheless. For example, a new cloud productivity suite can open up internal networking and communications channels amongst employees which can lead to untold efficiencies, acting as a centre of creativity and new ideas.
New business applications can also mean that you are nimbler than your competitors, more responsive to customers and more able to adjust to change. However, none of these benefits can easily be assigned a numerical value.
Working out ROI in Absence of Numbers
As we suggested earlier, being aware of all the interplaying factors in technology investment ROI is often more important than calculating the real numbers. Yes, where costs are known from a numerical perspective, calculations should be made. The outcome – negative or positive – should be used as an analytical starting point.
Next, layer across the less tangible costs. For example, if a project just breaks even from a numerical perspective, the risks involved may mean that it is better called off. Or, if it is clear that your clients demand a new technology you may need to roll it out to keep up with competition, even if the numbers point to a modest financial loss on the investment.
In essence, your business should make the ROI calculations that it can make to get to a number. That number should then be put into the wider context. Indeed, calculating ROI on a business application is more of an analytical exercise, you cannot just crunch the numbers. Give ROI sufficient thought and your business will come to the right conclusion.
