Every successful business needs to calculate their technology ROI (return on investment) and make adjustments when these investments underperform. Calculating technology ROI will give a rough measurement of productivity as complex technology may even decrease productivity if incorrectly implemented. Breakthroughs such as mobile technologies can provide a productivity boost by accelerating work cycles and improving workflows. Even small business CFOs are finding they can track technology ROI by approaching the process the same way they create and work their annual budget.
Real mileage may vary – businesses do their best, but often have limited time to think about their return on technology investments. Some technology takes time to wrestle to the ground which makes it hard to calculate the costs and benefits. Document the biggest costs first and then progress to the smaller costs as time permits. Look for unexpected benefits and work to quantify them.
Everyone makes mistakes, particularly the first time – Painful as it may seem, the process of trial and error is a great teacher. As with budgeting, new technology involves a surprising number of variables. Don’t be surprised if they are hard to quantify in the beginning. Stick with it and your accuracy will improve
Don’t give up if the first attempt falls short – CFOs know that if the budget fails the best solution is to tear it up and start over. The same thing is true with summarizing technology returns. While nobody wants to admit to a failed technology initiative, it is better to acknowledge it then either pivot or make a fresh start.
If it’s not working, keep adjusting – Just like your budget, don’t keep making the same mistakes over and over again. Figure out how to avoid mistakes and move on. With good technology management, you will avoid the tendency to overspend as well as learn how to make adjustments for reallocated resources.
Success takes commitment – It is all too easy to make excuses for problems with the technology ROI calculations rather than understanding what caused the errors. Just like your budget, significant technology projects won’t work unless there is a strong commitment to make them successful. Technology ROI is not some kind of jail sentence. With some practice determining technology project ROI will become second nature.
Don’t worry about your competition – Don’t let anyone tell you how to implement your chosen technology or pressure you into spending more on a flashier system that could drain your profits. No two businesses budget alike so expect your technology ROI process to be unique as well.
Don’t let technology over-consume resources – Effective organizations have a positive ROI for each technology project as well as for their overall investment in technology. When businesses use technology effectively, the results are equal or greater than the resources invested. That’s what it means to have a positive ROI.
Use ROI to make purchasing decisions – When making a purchase decision, thinking about ROI will help you consider whether the product or service is worth the money. ROI is also useful when looking at past investment choices. This ROI analysis will help you evaluate investment decisions and make more accurate projections of costs and benefits for the next project.
Look beyond the short term to consider overall ROI – Key management and outside advisors should look at how resources are allocated toward hardware, software and services as well as across business units. It is important to validate that expenditures are in proportion to technology benefits by business function.
Rough ROI calculations don’t require a CPA – keep things simple by using the most basic formula: ROI = net gain/cost. For example: I spend $100 and make $150. My net gain is $50 so the ROI = 50/100 = .5 or 50%. Assign numbers to the costs and benefits knowing that many of the numbers will be guesses and approximations. Make note of all assumptions as you go along and consider running some alternate scenarios. For example, if your estimate of employee time saved is over or under by 10%, how does that affect the equation? Make sure to choose a timeframe as all ROI results are measured over a finite time. For items with an ongoing cost, such as a software subscription or equipment maintenance use these factors in the calculation:
- Timeframe – How long will it take to recoup the investment?
- Consistency – How will the returns accrue — regularly or irregularly?
- Precision – Do the numbers have to be exact or will an estimate be good enough?
There are many new technologies that can provide benefits to a businesses. Ultimately, company leaders want to know which investments will demonstrate improved performance and increased revenue. If an investment in new technology won’t generate positive ROI, rethinking the strategy is a wise decision.