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.