Simple Return on Investment Calculations
Elton Billings elton@cluebox.com
Focus of This Discussion:
Tactical ROI ROI for a single initiative or application Identification of sources of Return Examination of task cost savings on a pertransaction basis
Some ROI Comparison Methods:
Return as a percentage of Investment over a fixed period:
(Return / Investment) x 100
Return after deducting Investment for a fixed period:
(Return - Investment)
How long until Return equals Investment:
(Investment / Return per week)
Identifying Costs (Investment)
One time costs
Development costs Cost of any new software Cost of any new hardware Training costs
Ongoing costs
Information update costs Maintenance costs
Training costs
Costs to increase capacity when needed
Identifying Sources of Return
Savings through shorter task time Savings through shorter processing time
Savings through the prevention of “leakage”
A Method for Identifying Savings:
Observe old process Observe new process Make sure to include all phases of both methods Measure process times for both Check for any statistical differences in outcome Measure frequency of task
Understand fully loaded employee cost per hour
Old Conference Room Application:
Web Conference Room Application:
Costs and Savings
Costs:
3 days to develop interface 24 hrs x $40 = $960
Savings:
Each reservation took 10 minutes less
4560 non-recurring reservations first year 760 hrs x $40 = $30,400
ROI Calculations:
Return as a percentage of Investment over a fixed period:
(Return / Investment) x 100
($30,400 / $960) x 100 = 3167%
Return after deducting Investment for a fixed period:
Return - Investment $30,400 - $960 = $29,440
How long until Return equals Investment:
Investment / Return per week
$960 / $585 = 1.6 weeks
Business Card Request:
Identifying Sources of Return
Online form and paper form took about the same time to complete ?????????? The rest of the story…
Paper form left in manager’s inbox for approval When we tried to follow up, it was gone Filled out form again Purchasing department completed and sent printing request to vendor
Costs and Savings
Costs:
5 days to develop application and web interface
40 hrs x $40 = $1600
Savings:
Each order took 10 minutes less time for routing and processing One third of orders involved about 6 minutes for searching, questions, and re-submission of forms 743 Orders first year of application
148 hrs x $40 = $5920
ROI Calculations:
Return as a percentage of Investment over a fixed period:
(Return / Investment) x 100
($5920 / $1600) x 100 = 370%
Return after deducting Investment for a fixed period:
Return - Investment $5920 - $1600 = $4320
How long until Return equals Investment:
Investment / Return per week
$1600 / $114 = 14 weeks
New Business Card Request:
Vacation Request:
Identifying Sources of Return
Old process was to send e-mail to department admin, who forwarded to payroll after approval Online approval process cut delays due to missing information, loss of e-mail
The rest of the story…
Discovered verbal approvals sometimes skipped process E-mails not always forwarded
No reliable record of requests existed
“Leakage” may have been as great as one day per person per year
Costs and Savings
Costs:
5 days to develop application and web interface
40 hrs x $40 = $1600
Savings:
Each request took 10 minutes less time for routing and processing 3218 requests in first year 536 hrs x $40 = $21,440 Estimated 5% of employees correctly reported one additional day of vacation each
5% x 800 employees = 40 days
320 hrs x $40 = $12,800 Total savings = $34,240
ROI Calculations:
Return as a percentage of Investment over a fixed period:
(Return / Investment) x 100
($34,240 / $1600) x 100 = 2140%
Return after deducting Investment for a fixed period:
Return - Investment $34,240 - $1600 = $32,640
How long until Return equals Investment:
Investment / Return per week
$1600 / $658 = 2.4 weeks