# return on investment calculation

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```					   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 per-
transaction 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
   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
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
Vacation Request:
Identifying Sources of Return
   Old process was to send e-mail 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
   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

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 views: 465 posted: 10/25/2008 language: English pages: 19
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