By Ted Henson on Oct 24, 2012
Here is a challenge for everyone. Just about everyone has been asked to provide or calculate the Return on Investment (ROI), so I will assume everyone has a method they use. The problem with stopping once you have an ROI is that those in the C-Suite probably do not care about the ROI as much as Return on Equity (ROE). Shareholders are mostly concerned with their return on the money the invested. Warren Buffett looks at ROE when deciding whether to make a deal or not. This article will outline how you can add more meaning to your ROI and show how you can potentially enhance the ROE of the company.
First I want to start with a base definition I am using for ROI and ROE. Return on investment (ROI) and return on equity (ROE) are ways to measure management effectiveness, parts of a system of measures that also includes profit margins for profitability, price-to-earnings ratio for valuation, and various debt-to-equity ratios for financial strength. Without a set of evaluation metrics, a company's financial performance cannot be fully examined by investors. ROI and ROE calculate the rate of return on a specific investment and the equity capital respectively, assessing how efficient financial resources have been used. Typically, the best way to improve financial efficiency is to reduce production cost, so that will be the focus.
Now that the challenge has been made and items have been defined, let’s go deeper. Most research about implementation stops short at system start-up and seldom addresses post-implementation issues. However, we know implementation is a continuous improvement effort, and continued efforts after system start-up will influence the ultimate success of a system.
Most UPK ROI’s I have seen only include the cost savings in developing the training material. Some will also include savings based on reduced Help Desk calls. Using just those values you get a good ROI. To get an ROE you need to go a little deeper. Typically, the best way to improve financial efficiency is to reduce production cost, which is the purpose of implementing/upgrading an enterprise application. Let’s assume the new system is up and running and all users have been properly trained and are comfortable using the system. You provide senior management with your ROI that justifies the original cost. What you want to do now is develop a good base value to a measure the current efficiency. Using usage tracking you can look for various patterns. For example, you may find that users that are accessing UPK assistance are processing a procedure, such as entering an order, 5 minutes faster than those that don’t. You do some research and discover each minute saved in processing a claim saves the company one dollar. That translates to the company saving five dollars on every transaction. Assuming 100,000 transactions are performed a year, and all users improve their performance, the company will be saving $500,000 a year. That $500,000 can be re-invested, used to reduce debt or paid to the shareholders.
With continued refinement during the life cycle, you should be able to find ways to reduce cost. These are the type of numbers and productivity gains that senior management and shareholders want to see. Being able to quantify savings and increase productivity may also help when seeking a raise or promotion.