Investment in IT is crucial in today’s dynamic markets. But you need the ROI for budget approvals. How? Take a look at this 3-step calculation example.
If you would like to remind yourself why it’s so important to make the right investments today, just read my introductory posts on ROI and Brexit. The future success of your global supply chain depends on it. On the right investments that is – not necessarily on reading my previous posts.
There is so much going on these days – from technological advances and globalisation to new competitive environments and various, global security concerns. The right investments are crucial. And to get your budget approved, typically, you will need the ROI.
As promised in my last post and without further ado, I will share this actual and highly useful ROI calculation example with you. It was set up by Rainer Hackstein, one of our experienced supply chain consultants at AEB. Rainer emphasised that there are several ways of calculating an ROI – and our version demonstrates just one of the possible ways to do it.
The following example is based on a multinational corporation that is implementing a new software solution. The area of IT deployment is logistics – for procurement and distribution.
Calculating one-time and recurring costs, tallying up the potential savings, and comparing the numbers: this is how you find out whether your IT project will be profitable. OK? Let’s do it:
Calculating ROI of IT projects: Step 1 (costs)
To calculate the invested capital, you must first determine the investment amount subject to capitalisation. This is outlined in the following table on the right (item A). It includes the costs of licensing the software, for example.
The investment amount subject to capitalisation can also be zero. This is the case with a leased solution, for example, for which annual or monthly payments have been negotiated. Such payments would then be included as annual licensing costs in the cost assessment under item B.2.
Another major category is the implementation costs (item B.1): this includes costs for internal and external services, project management, software installation, the adaptation of interfaces, and training costs.
The third category is the annual operating costs (item B.3): examples include the support costs for the software (typically a defined percentage of the purchase price) and hardware, leasing costs for servers, and costs for database licences.
Getting together all cost components is hard work. It’s good advice to work with the quotes submitted by providers. Nevertheless, it is common for implementation costs in particular to get out of hand. The primary risk of cost deviations stems from change requests in the middle of a project or misunderstandings in the definition phase. Most risks can be managed through strict project management. But some companies still factor in a lump-sum risk premium when calculating costs to be safe.
Calculating ROI of IT projects: Step 2 (savings)
It is harder to estimate the savings – or the profit, or the value that the IT investment is supposed to generate. Such estimates are highly case-specific, of course. In all likelihood, however, the benefit of implementing logistics software lies in improved processes and the automation of manual tasks. Using software to manage automated processes, and replace manual verification, research, searches, and data entry.
Calculating ROI of IT projects: Step 3 (comparison)
Best for last, here comes the easiest step of all three: the comparison of cost and savings. And hopefully, it returns with a good result for your planned IT investment.
And that’s it :).
I personally find it rather useful to have examples to look at. If you feel the same and are currently preparing an IT business case, I hope this ROI calculcation example comes in handy. I wish you success for your business case and (hopefully) for the upcoming IT implementation, too.
Let me know if you have any questions or comments, I look forward to hearing from you – here in this blog, or on LinkedIn.
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