Proving Business Case: Tips for Calculating IT ROI
Updated: Jul 24
The majority of CIOs have never needed to balance IT projects with a business’s sales numbers. But they should be more business minded and ensure that the technology they implement has a positive ROI for the business. According to a 2019 CIO.com survey, 81% of IT leaders agree that CIOs are now under extreme pressure to secure their investments and prove ROI.
Before major initiatives can get underway, C-suite executives and shareholders want to know if the investment will have a positive impact on the enterprise. To earn the support of stakeholders, CIOs must weigh the anticipated returns against costs to determine the value, or ROI, of an investment to the business.
Throughout the ROI calculation process, there are two fundamental questions CIOs should keep in mind, regardless of the complexities of the IT initiative or how complicated it is to prioritize them. One, does this project need to be completed at all? And two, if there are multiple approved projects, in what order should they be done?
The basic, but useful, metric for the ROI formula is:
ROI% = (Return – Cost of Investment) ÷ Cost of Investment x 100
A project with a higher ROI is likely to return more benefits to the business and should be prioritized over those with low ROIs. Although the equation may seem simple, there are a number of considerations to factor in, as forecasting can be thrown off if key elements are missed.
Hard Benefits versus Soft Benefits
There can be tangible and intangible benefits to any IT project. The tangible benefits are hard costs that a dollar amount can be ascribed to. For instance, hard costs might include increased productivity which reduces the time to finish a task, or an identifiable number of employee hours saved from fewer errors.
Examples of soft, or non-financial costs—which are harder to quantify—can include an increase in customer satisfaction, or more accurate information reporting.
It’s critical to be realistic when determining the soft benefits of an IT project, and they should not be included in the ROI calculation. However, they are important factors in decision-making, and should be explained fully in the business case for the project.
Engage and collaborate for a thorough IT ROI calculation
IT projects affect business segments outside of the IT department. Therefore, it’s vital to seek ownership and support of the ROI calculations from other business units, which may have valuable insights when it comes to identifying missed costs or benefits.
Approach all business departments that will be affected by the new project, get their input on estimating the hard benefits and costs, and include the numbers in the total.
It’s also worth asking for input from corporate executives, particularly the Chief Financial Officer or the Chief Operating Officer, who have broad knowledge of the enterprise. They can help point out possible tangible benefits or costs not anticipated.
To ensure a thorough ROI calculation, CIOs should consider enlisting their own team to help. Have staff complete an exercise of clearly articulating the benefits and costs in layman’s terms in a one-page pitch. If positive outcomes can’t be clearly defined, the project may have negligible returns.
Conversely, have employees debate the ROI method and findings. By asking and answering the hard questions—particularly the ones you are most afraid to answer—it’s possible to discover any problems.
Understand the time scale
Consider how long the timeline is for the implementation and duration of the IT project. Software can change quickly. Thus, if there is a short implementation period of several months, it is more likely that the IT project will also be replaced on a shorter time horizon; for example, three years instead of five years. In terms of obsolescence, hardware technology can age even faster than software technology.
A shorter implementation period will reduce the length of time of business disruption, typically require less work, and have fewer associated costs like training. On a longer deployment timeline, there’s a greater chance it will take more time to realize the return on investment. Be sure to include all of the costs over the whole-time horizon, whether there are subscription costs associated with cloud software, or an initial software purchase price and annual maintenance.
Test and start small
One way to find out if an IT project’s ROI is going to deliver forecasted results is to test the implementation with a proof of concept.
Create a test pilot project that is modest in size and investment, and measure the results to gain a view as to whether the initiative will be successful when scaled.
Apply consistency across IT ROI calculations
When proving the ROI on a number of IT projects, and subsequently comparing them to each other to create a priority list, take care to ensure consistency across calculations.
Ultimately, by preparing an ROI for an IT business case, or many ROI calculations for prioritization of various projects, the two basic questions of ‘should this project be done?’ and ‘what order should we do the projects in?’ must be answered.
If the IT project has a low or poor ROI, it should be scrapped or, at the very minimum, revisited with significant changes. And, when comparing multiple projects, prioritize those with the greatest ROI to optimize the value of IT to the business.
About the Author
Ashiq Ahamed is the Founder & Managing Partner of SolvedAF Consulting Inc., a boutique consulting firm providing IT consulting, growth advisory, and digital transformation services. As a strategic, delivery-focused leader, he works with organizations to change their thinking when it comes to technology, implementing solutions that achieve organizational efficiencies and improve the end user experience.
Known for his ability to see the big picture, Ashiq draws on his expertise to help organizations align their technology with their business goals.
Learn more about SolvedAF at www.solvedaf.com.
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