Those of us who’ve retained something from our high-school foreign-language studies may recall that “Roi” is French for “King”. However, for those who prefer the even more international language of Business, ROI stands for “Return-on-Investment”, one of the most fundamental metrics in most decision-making processes, a fancy term for “is it worth doing?”
With the obvious exception of regulatory requirements or ethical imperatives, all business decisions must pass the acid-test of “Is the cost justified?” In other words, will the price and effort of whatever is being contemplated result in either an increase in revenue or a reduction in current operating costs? Decisions regarding the former are often incredibly specific to the industry and business, as they typically deal with changes in the products or services currently offered, and scope-of-operations. “Do we add a new production line” or “Should we lease an additional excavator” represent the sort of business decisions which, while possibly costly and potentially highly strategic, aren’t very difficult to quantify as they represent known costs and predicted outcomes, and all that is required is for the ROI ratio to meet-or-exceed current gross margins.
Matters get somewhat trickier when attempting to calculate the ROI of a modification to current operating processes, such as the implementation of a new software application which, by definition, implies both procedural changes and an acquisition cost. While these aren’t too difficult to quantify, it is the projected outcomes which represent a problem. Many process improvements focus on operational efficiencies, such as reduced effort or paperwork elimination. During the heyday of Y2K software remediation projects, it was common for vendors to express potential savings in Full Time Equivalents (FTE) reductions. This turned out to be, in effect, “funny money”, as no one could ever quite figure out how to monetize the potential FTE reductions, which were typically fractionalized across the entire enterprise. Good luck trying to recoup .2 FTE from HR, .15 FTE from Accounting, .35 from Engineering, and so on. And while paperwork elimination is always a welcome objective, it’s equally challenging to convert success in that area into bottom-line dollars.
So what do we need to look for when assessing the ROI-driving opportunity? Two key aspects: First, that the ratio of the ROI (expressed by dividing the projected return by the anticipated cost) be significant enough, and second, that it flows actual savings to the business’ balance sheet. The ratio needs to allow for implementation costs, process disruption and modification, learning curves, and possible variability on the return. A good rule-of-thumb is to look for a 10:1 potential return (or more), much like the saying “Aim for the stars, and you might hit the moon” even if the projection is off by 50% you will still recoup a significant ROI. Regarding the “actual savings” aspect, seek out those return components which represent an actual reduction in cash expenditures, or a driving force thereof. Ignore the “funny money” projections (FTE’s, efficiencies, intangible improvements) and focus on those projects which result in operational cost-cutting, without impacting revenue, staffing, safety, or quality. You’d be surprised at the opportunities you may find to eliminate expenses that you’d long ago accepted as part of “the cost of doing business”.
Listen to ROI; he’s the true king of decision-making.
At Compatica, we pride ourselves not only on the quality, value, and ease-of-use of our Workplace Incident Recording application, but also on its extremely low subscription fees, which, in turn, drive an excellent ROI for our clients. To that end, we’ve developed an online Return-on-Investment calculator. Please visit https://compatica.com/roi/, select the values which best represent your organization, and find out just how much you can save by implementing Compatica.