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Measuring ROI for Your Tech Investment

When measuring the Return on Investment (ROI) on a technology project, it’s important to assess both the tangible benefits but also the less tangible, and ancillary benefits of the investment. This article will examine the various metrics companies can measure when analysing ROI for their technology spend.

According to research carried out just before the COVID-19 pandemic, an estimated $4 trillion was the global investment in technology, a figure that has likely increased significantly with the paradigm, and lasting, changes to the world of work and the establishment of remote working. Investment in technology can range from an entirely new suite of servers, laptops, software and security systems, to a monthly €50 spend on a software description.

How to Define ROI?

Return on Investment (ROI) is an established financial metric that compares the cost of what you spend with the benefits of that particular investment or initiative. The simple formula is the value of the return, or benefit, divided by the cost of the investment. If you developed a new product landing page, which costs €25,000 to develop but returns €30,000 in sales then you’re looking at €5,000 in benefit and a 20% ROI. Quite simply, if you spend €1000 on a new software subscription, which enables you to complete a project that pays €5000, that’s an impressive 500% ROI. If you spend €200 on a new subscription, but then lose four hours in training and adapting, your ROI is going to be negative, depending on the financial value you place on hours within your organisation. If your rate is €100 per hour, then you’re looking at -100% ROI. But the following month, that same subscription could generate a positive ROI as the business adapts to it and what it allows them to do.

While the above examples may be simplistic, the fundamentals are sound. The measurement of ROI is vital as it enables organisations to justify and prioritise investments. Is a subscription worth renewing? Is a new operating system going to make projects completed faster? These are all questions for both IT and financial professionals.

Benefits and Costs

When analysing ROI, a workable and realistic timeframe is important. It’s highly unlikely you’re going to see the benefit, or the cost, of a new system within a month. Also, while the formula for assessing ROI may be straightforward, it doesn’t necessarily capture all the benefits, or costs, of your tech investment. Less tangible elements include time, whether a new system frees up workers’ time and what can you do to leverage that time for new opportunities? Other positive outcomes can include improved customer satisfaction, a reduction in expenses or enhanced processing of transactions. Measuring the less tangible results of an investment can involve more complex financial modelling such as Net Present Value (NPV) which assesses the present value of all revenue that a system can generate in the future and Internal Rate of Return, which assesses the annual growth that an investment can generate.

Measuring ROI

Of course, accurately measuring ROI isn’t something that any one person in the organisation is likely to be able to do accurately. Estimating the costs and benefits can be challenging as you may need to assess different data sources, all of which can have competing priorities and usages for the particular investment. You need to use a probability approach, factoring in best and worst-case scenarios, in terms of the timeframe for the investment to start generating returns and what those financial returns could be, in both the best and worst cases. In terms of technology investments, the initial outlay can be significant and the ultimate benefits uncertain until it is put to the test in the working environment. You also need to consider technical debt, which is the IT time required to implement, run and support the new investment.

That’s why as much data as possible is hugely important. Analysis of the successes and failures of past technology investments should inform how you implement any future ones. Expert consultants can provide a welcome external perspective, but be careful not to let external voices drive the narrative in terms of what you are trying to assess, as nobody knows the objectives of the company better than those involved in running it.

It’s also an ongoing process, as you’ll need to analyse the benefits and costs over time, using KPIs and reporting to track the progress and results of new systems. Will your target ROI change as new opportunities arise from this investment? Has the investment changed the way that another area of the business functions, and can those benefits be factored into the ROI? It’s an ongoing conversation and analysis.

Remember the Customer

While analysing the ROI of a technology investment can affect the priorities and ways of working of your business, it is also essential to assess what it will mean for your customers. If a system may make things run swifter in your business, but means a negative user experience for customers, it’s not something to pursue in even the short term. Experimentation in a ‘live’ environment is also vital to understand how customers will react to this new interaction. Gurmeet Singh is the Chief Digital, Information and Marketing officer for the US-based convenience store chain 7-Eleven. In recent years, the company has trialled services such as Amazon Lockers for in-store collection, accepting Amazon cash at 8,000 of its stores, developing a customer loyalty app and ongoing AI and augmented reality interaction for customers. In an interview with CNBC, Mr Singh said that the “biggest threat is understanding the customer, who the customer is today and who it will be tomorrow. What people miss, and what we have been clear about, is saying ‘do not start with digital, be customer-obsessed and digitally enabled, and those are very carefully chosen words.”

For expertise and information on the best technology services, practices and resources for your business, get in touch with us at IT Experts Europe.