Calculating ROI

+ADJUNCT

Challenges in Calculating ROI

By Bob Kasper

The concept is simple, the calculation is difficult. At first glance, the equation seems easy:

ROI = decreased expenses + increased revenue

project costs

The difficulty starts in calculating the first component, and gets harder when calculating the second. Components of decreased expenses include the amount of time employees must spend in the future due to perform tasks associated with improved processes. The amount of time saved can be difficult to pinpoint. Most traditional approaches profile current activity levels and forecast future levels. In fact, many post-implementation studies have failed to establish savings from reduced labor unless a staff reduction is attached to the system. Unless specific work is done to redirect labor released by a new system, the benefits will not be recaptured. Any ROI calculation must include the effort to capitalize upon these increased efficiencies.

Additionally, the value of time saved can become arbitrary based on the formula used. For a starting point, the employee’s salary is an easy way to measure savings, but one should also include direct employee “overhead” costs, such as benefits, including all insurance costs, retirement plans, and all other employee benefits. Many companies approximate these benefits to be 32-35% of an employee’s salary. This overhead can be extended further to include office space, computer-related expenses, and other less tangible costs. But without a full survey of each savings item, this calculation may be misleading. Many overhead costs may be relatively fixed and will not be changed by minor staff reductions.

Before approaching an ROI, it is important to get clear agreement with program sponsors on which components of cost savings that will be considered legitimate. Agreement on the calculation and relative balance will ease gaining sponsorship. A blanket requirement for ROI can only be accommodated by a thoughtful step-by-step approach to the unique factors in each program or project. In addition to labor savings, other factors for savings should be considered. Outside assistance in establishing correct values and equivalents can provide authority to an impartial ROI calculation.

Justifying a project on increased revenue is also difficult to calculate. The process itself is an estimate based on different variables, each of which can also be an estimate. A variation on this calculation occurs when a company decides to do a project not to increase revenue but rather to try and stave off revenue loss due to competition. Trying to calculate that component is another foray into guesstimation.

For the rest of the calculation, project cost is probably the easiest component to determine, but there are pitfalls in this calculation as well. Employee costs again factor into this value, but not only for the reasons listed above. When determining the labor cost of a project, one key element is the percentage of time each employee spends on the project. Even employees who are 100% dedicated to a project are not truly spending all of their time on project-related activities. Staff meetings, personal email, and other non-productive time must be factored in.

Finally, depending on the project’s objectives, there are other factors that may come into play. For example, one objective of many projects is “increased customer satisfaction”. The individual amount of improved customer satisfaction that a single project brings to a company can be next to impossible to calculate in the first place. Determining a monetary value to this increase can be even more difficult. Also, the risk of not doing a project is sometimes overlooked. The failure of a company to keep up with its competition is detrimental at best, and potentially devastating in the long-term.

All this being said, calculating a project ROI is a worthwhile exercise. All projects should be held accountable, and creating specific metrics is Project Management must. Those performing the ROI calculations must simply understand that their numbers must be defensible, but will not be definitive.

Bob Kasper is an expert in project and program management. He has successfully helped clients like Hewlett-Packard, Loudcloud and Cisco improve their project management skills and value projects appropriately. Interested parties can contact Adjunct (ADJUNCT.INFO) for help with this and other Project Management issues. Our experience may help unlock this difficult but important calculation.