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the180 - A Proposal for Technology ROI
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A Proposal for Technology ROI

continued from another the180 topic

ROI = Return / Investment

Return = Revenue or Savings - Ongoing Costs

Revenue or Savings = Dollars x Volume x Success Rate

  • Dollars - The average dollars saved or earned for every successful use or transaction
  • Volume - The expected number of uses or transactions
  • Success Rate - The expected success rate expressed as a percentage. Not every transaction will be successful. The success rate will make or break many technology projects.
  • You will have to make rough estimates of the dollars per use and the volume of uses.
  • You will have to define the general uses or transactions
  • The early estimate of the success rate will probably be too optimistic, but it is worthwhile to explicitly write it down and track it.

     

Costs

  • Total Fixed Cost - The expected total cost of developing the technology project
  • Cost for All Successful Transactions
  • Cost for All Unsuccessful Transactions
  • Allocated Fixed Cost - A portion of the total fixed cost amortized for the time period.
  • Too many companies assume that they can't do much about the costs of training, support, and the time it takes to use the technology.
  • However, improving the technology design does lower these costs.

 

Costs for All Successful Transactions

= Number of Successful Transactions x Cost per successful transaction
= (Success Rate x Volume) x Cost per successful transaction

 

Costs for All Unsuccessful Transactions

= Number of Unsuccessful Transactions x Cost per unsuccessful transaction
= (100% - Success Rate) x Volume x Cost per unsuccessful transaction

 

Putting it all together

  • ROI = Return / Investment
  • ROI = (Revenue or Savings - Cost for All Successful Transactions - Cost for All Unsuccessful Transactions - Allocated Fixed Cost) / Total Fixed Cost
  • ROI = [Dollars x Volume x Success Rate - (Success Rate x Volume) x Cost per successful transaction - (100% - Success Rate) x Volume x Cost per Unsuccessful Transaction - Allocated Fixed Cost)] / Total Fixed Cost)

Even if you just work with Revenue or Savings = Dollars x Volume x Success Rate, you will keep your technology project focused on success.

 

For the algebraically inclined

ROI = [A*B*C - A*E*C - (1-A)*F*C- D/T ] / D

Where

  • A = Success rate
  • B = Dollars of savings or revenue per successful transaction
  • C = Number of transactions
  • D = Total fixed cost
  • E = Cost per each successful transaction
  • F = Cost per each unsuccessful transaction
  • T = Number of time periods for total cost allocation

 

Posted May 29, 2002
Edited February 5, 2003
By Joe Grant

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