Return on Investment (ROI) comes down to one question: does the
benefit delivered by the technology measurably outweigh the costs
involved in delivering it?
In many cases, small to medium sized businesses (SMBs) don’t
have the same technical expertise as bigger companies. This can
make shopping for technology projects a minefield. For this reason,
companies like yours often purchase products that aren’t quite
right for your business and fail to achieve the ROI expected.
One problem is that SMBs often buy technology products
piecemeal, and don’t have an overall view of their technology
‘architecture’. In addition it’s easy to duplicate processes or
information.
So how do you ensure that the investments your company makes in
technology are the right ones? The first step is to stop thinking
about technology all together. The key to successfully choosing
technology products is to only think in terms of your particular
business problems and needs. Do you need more contact with
customers? Do you want to reduce the amount of time it takes to
process customer orders? Do you need better marketing?
Once you have identified your business goal, map out the
existing process and consider how it might be improved.
In the very early stages of a technology project, don’t assume
that you can only talk to your local advisors and resellers. “A lot
of small to medium sized enterprises (SMEs) think somehow they
aren’t important enough to talk to someone like HP or Dell,” says
David Smith, general manager of HP’s small and medium business
unit. The problem with relying on local resellers or Internet
retailers is that SMEs may end up buying a load of cheap kit,
without realising the full benefit of technology to drive the
business, Smith says. “Technology is the fastest depreciating asset
in a company, and buying a load of PCs isn’t a particularly good
way to get return on investment. You should be looking for the
wider perspective, and vendors can often help with that.”
Increasingly, enterprise technology vendors are scaling down
products and prices to meet the needs of smaller customers. IBM,
Microsoft, HP and Oracle are among the high-end vendors who now
offer scaled down versions of their enterprise products at vastly
reduced prices. You can also take advantage of flexible pricing and
leasing models to reduce the upfront cost of new technologies.
When selecting technology products, companies commonly confuse
lower price tags with lower cost. In fact, the upfront cost of
technology products typically account for only a third of the total
project costs. In the case of software, pricing is even more
deceptive, as licenses account for only 14% of total project
costs.
The most expensive element of technology after the upfront
investment is support costs. Many small businesses will need to pay
third parties to support their IT systems because they don’t have
the resources or expertise to do this. In general, this is a good
idea – service providers and resellers benefit from greater
economies of scale and outsourcing support is usually cheaper for
businesses.
However, don’t sign the first service contract you see. Annual
support contracts can easily add 20% to the total license fee, and
companies should negotiate hard for added extras. Consider whether
you need all the support your supplier offers.
Once you have calculated the best possible costs for a
technology investment, you are ready to look at the returns the
technology could deliver. Here, it is vital to include only those
benefits that you can measure as delivering a dollar value to the
business. Customer service agents may be able to use a new remote
access server to work from home, but will this save the company any
money? Will a mobile sales rep be able to book more orders or
collect payment more quickly as a result?
There are common mistakes that companies of all sizes make when
calculating return on investment [see below]. But the most common
mistake for small businesses is assuming that saved time or faster
processes are always beneficial. “If you save people 15 minutes and
they spend that time having a cigarette break then it isn’t exactly
beneficial to the business,” says Microsoft’s John Coulthard. “If
you want to see whether your new systems are really delivering, you
have to be a bit ruthless.”
Common ROI Mistakes
1. Use a consistent metric to measure the benefit of IT. This
can be as simple as appending ‘as measured by’ to all your benefit
statements
2. Think of ROI in business terms. Refer to projects as the
‘modernising customer service’ initiative rather than the new CRM
software project. This will help educate the company about the
point of the investment
3. Appoint one person who is accountable for each claim made in an
ROI case.
4. Consider the impact of a technology deployment on all aspects of
the business, not just the department where it is being rolled
out.
5. Incorporate risk into your calculations. It may reduce the
benefits of a project by more than 10%
6. Don’t assume that time saved is money saved. This only works if
you can usefully fill that time with profit-generating
activities.
7. Don’t count cumulative benefits. Ten projects which each cut
costs by 10% don’t result in 100% cost reductions!
8. Don’t build ROI models over ten year periods. As a rule, three
to five-year analysis is appropriate.