Measuring the Return On Investement (ROI)

Abstract

Return on Investment (ROI) is ongoing evaluation process that should be executed before and post the investment. During this process, analysis of the following three factors: value of a specific technology purchase over time, benefits, and costs should be evaluated. With such analysis, organization can avoid a lot of mistakes that could happen due to investing in a technology that could return many dividends or lead to a purchase mistakes. ROI process focuses on identifying the benefits, and the effectiveness of such technology on the organization’s mission. ROI processes involved in data collection that will help evaluate the benefits, and the over time return of such technology to an organization. In collecting such data, the collection process should be reliable, and the financial presentation for such data should be clear, understandable and believable to the decision makers. Some of the factors that will lead to the right results are: looking at the previous year’s budgets, the actual performance, published studies about the application of the technology from reliable sources that provides acceptable benchmarks and effectiveness of a particular technology (Kanter, 2009).

ROI Process

Details understanding of how staff doing their work before applying any new technology, and also data collection to support such details will help creating a healthy process in executing the ROI process. During this process, some serious questions should be asked such as, how the technology can help the staff to do a better work, improve performance, and how such technology can improve the ability of the staff to provide a better service to their clients. Pilot projects can be used to decide the effectiveness of theRIOprocess, and can determine the full cost/benefits and implication of a larger project on the organization. It’s imperative for any organization to understand that it’s not always necessary to consider the application of the ROI process for every technology purchase. With expensive, controversial, and high profile investments, the ROI process has to be considered in seeking better understanding for decision-makers (Kanter, 2009).

Kanter (2009) explained that the basic ROI process includes four important blocks:

  •  Benefits – Means how technology can enhance programs or improve services. Also, cost reduction, increase revenue should be part of the analysis.
  •  Metrics – Metrics are the unit of measure. Once the benefits are identified, the metrics and its value are an integral part of the ROI process.
  •  Value – means quantifying the benefits with a metric. Tangible benefits can be easily measured, and converted to dollars or time. Intangible measures are linked directly to the IT project that can’t be directly converted in dollars, however can be quantified based on the return benefits from such projects.
  •  Financial Formula – once the benefits, metrics, and values are identified, the financial calculation should show the following:
  1.  Direct cost of the technology investment.
  2. Savings in expense or staff time.
  3. The value of intangible benefits.
  4. The cost of alternatives or not investing of such technology.

Kanter (2009) stated that for any organization to achieve a successful ROI process the following has to be considered:

  • The technology features are important; however the focus should be on the benefits of such technology.
  • Tangibles benefits of the technology is the reason the ROI process is produced, however that process has also include the intangibles benefits of any technology.
  • It’s imperative for any organization to compare costs of alternatives technology as part of the ROI process for the decision-maker to be able to come up with the right decision.
  • To have accurate results inRIOprocess, pilot projects have to be considered to get the reliable number for the process.
  • Data collection should be reliable process, and based on facts and reports that investigated the technology.

One of the challenges that are facing the I.T. sectors these days are the return on investment calculation, and the ROI evaluation have become the subject of each I.T. conference these days. The increase of interest in ROI is driven from the fact of the demands that are raised by the clients and the senior managers to show the return on their I.T. investment. Also, the economic pressure and the high competition between businesses raise the intense to focus on the technology product cost, and the return of implementing such technology in any organization profits. With the increase of the interest of measuring and evaluating technology with the return of the investment the general trend toward accountability causes many I.T. departments within organizations to measure their contributions to the profit of these organizations, and applying the right process of the ROI (Roulstone, 2008).

To admit that I.T. technology cannot be measured is to admit that I.T. doesn’t add any value to the organization and can’t be subjected to accountability when it comes to the investment of any organization. In applying the right ROI analysis within any organization, an effective ROI methodology has to be used, and what need for this process is a rational, logical approach to simplify and implement the current budget constraints and resources within the organization. I.T. professional share the concern that the return on their I.T. investment has to show some results, and impact on the business improvement; otherwise I.T. funds will be reduced, and I.T. department in any organization will not be able to maintain its present status and its influence on the enhancement of the business process, and the business lifecycle. With the significant growth in competition in businesses that any organization might experience, I.T. can provide the staff with the right tools they need to meet competitive challenges and maintain efficient operation through automation, and effective tools (Roulstone, 2008).

Roulstone (2008) explained that for any organization to reach the effective ROI process, the following criteria has to be considered:

  • Organization must simplify the ROI process, and avoid complex formulas. In an effort to obtain the perfect process, ROI models become complex to understand, and therefore have been avoided to be implemented.
  • ROI process has to become a routine process within an I.T. department without additional resources. Also, considering the early planning for ROI evaluation can make a big difference in the progress of the process.
  • ROI process should be based on general accepted practices, and should include the theoretical factors as part of the process.
  • ROI process must consider the other factors that might influence the general process to result accuracy.
  • Flexibility in applying the ROI process should be one of the features in building the right methodology where such process can be applied to many projects.
  • The ROI process must be compatible with various data types which can be presented as output, quality, costs and time.
  • The ROI process should be able to compare benefits with costs, and any underestimated costs will only reduce the credibility of the ROI values.
  • ROI formulas must represent the benefit-cost ratio, and these formulas must compare the actual cost for the project to the benefits gained from the project.
  • A successful track record should be part of the ROI process that will be implemented to measure any investment within any organization, since many models are created without successfully being applied.

Conclusion

The ROI process principles are more than just data collection or crunching numbers to make sure that the organization is on the right track with its choices, and its investment in technology. It’s imperative for any organization to start the conversation and investigate the pros and cons of investing in any technology (Kanter, 2009).

Finally, I.T. planning team in any organization should be responsible to champion theRIOprocess, and such groups should consist of a mix of technical and non-technical groups that represent an honest opinion about the impact on purchasing certain technology. The discussions among these groups will result of written product that will be represented to the decision makers within the organization (Kanter, 2009).

References

Kanter, B. (2009) A very Brief Primer: Measuring the Return on Investment of Nonprofits Technology [Online]. Available from: http://www.nten.org/blog/2009/06/18/very-brief-primer-measuring-return-investment-nonprofit-technology (Accessed: 14 November 2009).

Roulstone, B. (2008) ROI for Technology Projects, Butterworth-Heinemann [Online]. Available from: http://books.google.ca/books?id=CAK0tAkF3DUC&pg=PA1&lpg=PA1&dq=Measuring+Investment+in+Information+Technology+Projects&source=bl&ots=XA3NQUkTKM&sig=02oBF48eOcL8wGzeXjH5ou8lFic&hl=en&ei=4P9SsOKLcX8nAf4i8WUCw&sa=X&oi=book_result&ct=result&resnum=2&ved=0CAsQ6AE#v=onepage&q=Measuring%20Investment%20in%20Information%20Technology%20Projects&f=false (Accessed: 14 November 2009).

 

 

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