Top Technology Investments & Financial Management must be one of your core skills in IT Leadership Role like #CIO. In some cases, Financial Acumen is the critical competence separating the Chief Technology Officer (CTO) from the Chief Information Officer (CIO). Even the most visionary leader must operate in an environment of funding limits.
In this article, we will analyze on Top Technology Investments – Best way how to Calculate ROI (Return on Investments). ROI (Return on Investment) is a widely used measure to compare the effectiveness of IT Systems Investments. It is commonly used to justify IT Projects but can measure project returns at any stage and be used to evaluate project team performance and other relevant factors in the organization.
Managing the IT Investments
Measuring the Efficiency of Your Investments following the IT Return on Investment (ROI). Every IT organization should have a standard set of templates for project evaluation, Business Case, Demand Management, Analytics Dashboard, and so on. By using the same templates over time as standard, your stakeholders become accustomed to the presentation and your message is clearer.
People who don’t respect money don’t have any. – J. Paul Getty
Typically, financial analysis hinges on standard metrics such as ROI, Payback, Internal Rate of Return (IRR), and Net Present Value (NPV).
Alignment with the Enterprise Business Strategy is equally important. In fact, some organizations multiply by an “alignment parameter” when evaluating projects.
You are receiving many Ideas from the Business leaders to provide the solutions aligning the Business Strategy Portfolio and Programs.
As a IT Leader, we should build have a system how to process the Ideas, Accept the Ideas and create IT Demands to analyze further the Return on Investments (ROI) to initiate any Projects or Changes to co-create the Business Value and to achieve the desired outcomes.
When a feller says “It isn’t the money, but the principle of the thing” — it’s the money. – Kin Hubbard
One survey revealed that 84% of companies do not have business cases with Return on Investments (ROI) for their IT projects or perform them only for a few projects. Return on Investment Information Technology (ROI) is a major challenge for IT Leaders for any Project, Buying any Hardware, Software, Consulting Services, Training and so on.
We need to understand before initiate any buying or implement any Business Applications how to calculate ROI and show the benefit to Business in terms long term planning and business objective alignment.
So how do you judge ROI when it comes to a Technology Investment for your business? Start by doing a thorough LEAN analysis of your organization and industry.
Asked yourself two simple questions:
- Why am I doing this? It may be something thrust upon you by the organization. The age and/or performance of your existing infrastructure, or security concerns.
- How will it make my business better? Technology is often touted as making an organization more efficient, augmenting existing or opening new capabilities, or allowing for increased capacity and generate the revenue.
How to Calculate ROI on IT Projects?
Calculating ROI for IT projects can be a tricky endeavor and widely used measure to compare the effectiveness of IT Systems / Projects or other Technology Investments.
There are a lot of variables that can impact the outcome, so first you’ll need to figure out what financial benefits you stand to gain. I suggest that the financial benefits of IT investments typically fall into five buckets:
- Service Upsells to enhance the Revenue: It means, any IT investment that allows you to offer a new product or service – which, naturally, will increase your revenue generation opportunities.
- Reduction of the Cost: Refers to the benefits that will help you to the reduce costs (but not necessarily eliminate them). Some examples might be reducing travel expenses by holding online instead of in-person meetings or lowering your ongoing maintenance costs with better technology (this is a big one for IT projects).
- Avoidance of the Cost: Rather than reducing costs, this means you are eliminating a cost completely. Wouldn’t that be nice? That can happen thanks to fewer errors, reducing the number of customer support issues, or something everyone wants – better productivity.
- Reduction of the Capital: Some benefits can help you reduce your capital expenses. For example, reducing the cost of storage and server capacity if can reduced.
- Avoidance of the Capital: Again, we’re talking about the difference between reduction and avoidance, so a benefit that would help you get rid of a capital expense entirely would fall into this category. (An IT investment that means you don’t need to build a new data center would fall into this bucket.)
The funny thing is the basic ROI calculation equation is stupidly simple:
Return on Investments (ROI) = (Gains/Return on Investment – Cost of Investment) / Investment Cost) x 100
This equation works for calculating ROI for any investment – not just IT. If your IT Team uses Agile methodology, they’ll want to consider things like project velocity. But first, what’s the overall cost of your project? Your total cost might be nothing more than an estimate at this point, but that’s perfectly fine.
3-Steps ROI Calculation Process for IT Projects or other Technology Investments
1. The Cost – IT Projects ROI Calculation
In this stage, to calculate the Invested Capital. We need to find out the cost invested on the different components of the project including Capital Expenditure (CapEx), Operations Expenditures (OpEx).
First Category is Capitalized Cost like Licensing Cost, Hosting Cost and Software Modules
Second category is the implementation costs includes costs for internal and external services, project management, software installation, the adaptation of interfaces, and training costs.
Third category is the annual operating costs includes the support costs for the software (typically a defined percentage of the purchase price) and hardware, leasing costs for servers, and costs for database licenses.
To put all together, we need to find out all the components to have the cost of the project. Challenges are too many changes in the projects that can be controlled through strict Project Change Management Process. Here find out all the components to calculate the cost of the projects or Applications you are implementing as Project. Let see below the examples of components of the It Project cost.
- Selection Cost
- Software Selection Staff Costs
- Travel and Expenses
- Selection Tools / Programs
- Consultant Costs
- Implementation Costs
- Additional Licenses
- System Configuration
- Other Labor Costs
- Other Labor Costs
- Annual Maintenance
- Disaster Recovery
2. The Savings, Income & Benefits – IT Projects ROI Calculation
In this stage, we need to estimate the opportunities of savings that need to find out with alignment with the Business. Saving opportunities can be estimated like Process Improvement, Headcount savings, Revenue generation with various kinds of automatons, and so on.
Put all opportunities together to calculate the saving estimated by implementing the IT Project or Applications. You can calculate all Business benefits that can be quantified as savings that can be compared later with the actual cost of the project. Let’s see the example below the components of Savings and/or Income.
- Project Cost Savings and/or Income
- Decreased Helpdesk Support
- Reduced Clerical Staff
- Time Saved – manual creation of reports
- Annual Maintenance
- Reduced Consumables
3. The Comparison – IT Projects ROI Calculation
Now, this is the stage where you can make the comparison between the Cost and Savings and it will return the satisfactory results for the IT Investments for IT Projects. If preparing an IT business case, I hope this ROI calculation example comes in handy to your coming business case and (hopefully) for the upcoming IT implementation, too.
The following outputs can be included as a result:
- Total project cost Savings / Income
- Total Project Expenditures
- Net Project Savings / Income
- ROI (after 5 or 10 years)
- Net Present Value (NPV)
- Discount rate
- Internal rate of return (IRR)
- Payback (breakeven) year
Examples of ROI – Return on Technology Investments
Tricky Financial Calculations are easier to understand with real-world examples for most people. So, let’s see below together.
- A company spends USD 2,000 to upgrade its Financial system for better data visualizations and group reporting.
- This will help the company increase each Finance Team efficiency and time savings by 10 percent.
- Overall, the company expects the investment to generate an additional USD 10,000 each year in with efficiency.
- The benefits of the upgrade are expected to last two years.
- The ROI in Financial Terms is USD 18,000. (The USD 10,000 additional efficiency per year x 2 years = USD 20,000, minus the USD 2,000 initial cost of the upgrade.)
Other ROI calculations
Other calculations that are typically produced at the same time as calculating ROI are:
- NPV (net present value) i.e., the return a project will make at a specified discount rate. Ideally, this should be a high/positive value.
- IRR (Internal Rate of Return) i.e., the yearly return % of the investment – the higher, the better.
- Payback (also known as break-even point). This is normally expressed as the number of years it takes to recover the investment. The shorter the payback, the better will be.
Top Benefits of Technology Investments Calculating ROI
Calculating the ROI of Technological Solutions is about more than completing a simple equation; it is about understanding the benefits and value-creation of your choice.
All effective Enterprise Organizations knows that achieving a positive Return On investment (ROI) is good for business point of view. While ROI is typically discussed within a marketing or accounting parameters, businesses should also take the time to calculate this important figure for any Technology Investments.
Whether you are thinking about installing new Applications / Software’s or want to purchase new equipment’s / devices, calculating an ROI can help you to make a more informed and value-added decisions, which can provide immediate and long-term benefits to #Business.
Top 5 Benefits of Calculating ROI to Business
Calculating the ROI of a Technology Investment starts by completing the following formula: ROI = Net Savings and/or Income / cost. However, the true impact of an ROI analysis is slightly more complicated.
To start, you should determine the possible immediate and long-term benefits of your potential IT Solutions.
The Top 5 benefits of a Technology Investment could include:
- Reduce redundancies by saving money and increase revenue.
- Increasing employee’s productivity through new, innovations, and solutions.
- Resolving security vulnerabilities that could negatively impact your business, end-user, customer, or enterprise partners.
- Improving Technological efficiencies by streamlining or automating processes to reduce the complexity; and
- Enhancing revenue streams via an extended reach of your business services or products.
Additionally, below pros that we can estimate with the positive return of Investment (ROI)
- Technology reduces fraud, waste, and abuse.
- When used correctly, inter-department communication will drastically improve, making for a more efficient organization and delighted customers.
- New data analysis can identify strengths and weaknesses, driving process improvement, lowering costs, and improving ROI.
Successfully completing an ROI analysis will also require you to consider the full reach of the possible benefits. To do so, ask yourself the following types of questions:
- Why does your organization need the Technology Investment?
- What is your organization trying to accomplish within the industry and community? How will the recent technology help you accomplish the short or long-term goals?
- Can you quantify the mission impact of Modern Technologies in terms of both a business and a social ROI?
In short, completing an ROI analysis is about more than simply boiling down the decision to one of costs. Instead, you must understand how the choice to change or purchase technological solutions will impact your business, employees, customers, and end users.
From this understanding, you can then make a strategic decision that will result in a positive Return on Investment (ROI)