June 4, 2008 | Author: PM Hut | Filed under: Cost Management
Less Obvious ROI
By Thomas Cutting
When I was working with a system support group we had to scramble each month to determine the Return on Investment (ROI) for the system enhancements. Changes ranged from new reports to added functionality with other odd things in between. Needless to say, determining the ROI for adding a product color field to a report lacks a certain excitement and requires a lot of creativity. Technically it is the responsibility of the business group to assign ROI, but it generally falls on the technical team to make it happen.
I was particularly bothered by a formula one business group used to calculate the ROI. It was based on the number of hours expended to do the change and was calculated as follows:
Less than 40 hrs 100 * $105 = $10,500.
40 – 60 hrs 200 * $105 = $21,000.
Greater than 60 hrs Actual Hrs * 2.5 * $105
It had nothing to do with the value of the product, only the time expended to do it. With that logic we should have taken longer to do everything so we could save more money. Since ROI is the business’s responsibility whether it makes sense or not that is the calculation we use when ROI isn’t obvious.
So are there any decent ideas for determining more realistic ROI values? Some are obvious like replacing inefficient hardware and decreasing the need for resources. Other times you need to dig for value. Three examples are time savings, employee satisfaction and client satisfaction.
Time Savings. Does the change allow people to do more in less time? One change we made allowed the users to copy and paste data from one system to another with a couple of key strokes. This simple change increased their productivity and save approximately 30 seconds to retype the name, address, phone numbers, etc. from one system to another. With 300 users processing 5 calls a day over the course of a year it would save $342,562 (2.5 minutes each day * 300 users / 60 seconds in a minute / 60 minutes in an hour * 261 days in a year * $105 an hour).
Employee Satisfaction. If turnover is a problem, changes like the one above can help with retention by impacting the way employees feel about the work they do. Each improvement can be ranked as low, medium and high based on how much it would contribute to retaining an employee. Assume it costs $5000 to replace an employee. If it is something slightly annoying the low value may be $1000. Medium might be $3000 and that thing everyone complains about would be $5000. Multiply that value by the number of employees impacted by the change. Ten employees using a high value change would have an ROI of $50,000.
Client Satisfaction. One company I worked for assigned a general value of $200 flat rate for client satisfaction. That seemed a little low to me and everyone had forgotten why $200 was chosen. For yours try basing the value of a modification on the likelihood of the client using your service or buying your product again. Dropping response time by customer service by 20 seconds may increase the loyalty in 1 out of 50 clients. What does an increase of 2% in repeat purchases do for your profit?
In the end the business owns ROI calculations and should have the final say in what is decided. It isn’t an exact science but together you can develop a meaningful way to attribute value to your changes.
Thomas Cutting, PMP is the owner of Cutting’s Edge (http://www.cuttingsedge.com/) and is a speaker, writer, trainer and mentor. He offers nearly random Project Management insights from a very diverse background that covers entertainment, retail, insurance, banking, healthcare and automotive verticals. He delivers real world, practical lessons learned with a twist of humor. Thomas has spoken at PMI and PSQT Conferences and is a regular contributor to several Project Management sites. He has a blog at (http://cuttingsedgepm.blogspot.com).
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