Yesterday we discussed the concept of knowing the expected return on investment (ROI) before making a purchasing decision for new IT equipment, software or services. Those of you that want to use this model for making purchasing decisions, can use a calculator we found on the Microsoft Office Web site.
It is only intended as a guide: it includes most of the costs/benefits we can think of, but may need to be adjusted to fit your unique circumstances.
A guide to help you use the calculator:
Increased Revenue: This should include all the additional income you expect from using the proposed technology. For example; if you are planning a new e-commerce Web site then you expect a significant increase in revenue directly from this technology investment. Try to factor in any additional income you would expect from having an edge over competitors, improving client satisfaction and therefore increasing referral rates, etc. Be realistic about when these revenues will be coming into your business.
Reduced Costs: If this is going to streamline a process you can easily show the reduced costs here. Do not forget though that many technology investments are designed to improve efficiencies and productivity, so you may well be able to show costs savings per unit. If the technology is going to reduce energy costs or storage costs, etc show those savings here. It may be that you are planning to use an electronic document management and storage system and will be able to reduce printing and storage costs.
Avoided Costs: This is probably the trickiest: how do you know what costs you have avoided? If you are experiencing delays and down-time with old technology try to figure out the cost of the idle time you are going to avoid through your investment. You may also want to factor an element of potential future costs should you not make the technology investment. For example; how much would it cost you if you experienced some significant data loss? Do not include all of this as there is only a probability that it will happen to you, but it would be wise to include a portion if this is part of the reason for considering the technology investment.
The spreadsheet then works out quarterly totals and cumulative totals for these items. These figures represent the fiancial benefits of the proposed technology investment.
One-time investment: This is how much it is going to cost you to purchase the proposed technology - your capital outlay. If you are able to spread the cost through rentals then this could be zero.
Ongoing Investment: This is the ongoing cost incurred directly as a result of having the technology in place. This would include such items as power (only if this is going to be additional - NOT replacing an existing cost), support, updates and upgrades and so on. The one item many people forget is training. If you are going to need to train staff to use the new technology then you must factor in this cost.
This section then calculates quarterly and cumulative totals for the investment required.
The bottom section goes onto combine the two previous sections. The example in the spreadsheet shows a negative ROI in the first quarter, but by the end of the first year this becomes a positive ROI. you may need to extend the chart to cover an extended period if you believe the life of the technology is longer than 1 year. You will then see clearly when you can expect to ‘breakeven’ and what ROI you can expect in future months/years.
Armed with this information you can then make the right decision about the propsoed technology investment.
If your supplier makes certain promises about savings and/or returns then I would suggest you build these into any agreement you sign. If you make a decision based on information they provide and this information turns out to be wrong who should bear the cost of that? I would suggest that asking a supplier to make a financial commitment to back up their claims will ensure they are more realistic about what their products and services can actually do.
If your supplier is unwilling to make such a commitment, give us a call to see what we can do for you!