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ROI in IT projects: How to measure efficiency of an investment in IT systems

How to asses the influence of an IT system on facilitating in-company processes? How to measure when and if an investment in advanced IT tools will yield a return? How to wisely consider implementing an IT system that will stay with the company for years to come?

It is easy – estimate ROI on each IT investment. You can find out all about calculating ROI below.

 

ROI in theory

ROI (Return On Investment) is, in short, one of the most valuable profitability indicators. With respect to IT projects, ROI helps determine if a given investment may bring material gain over a given period of time. In other words, ROI helps managers to make an informed decision on implementing an IT system.

This is how you can calculate ROI for your investment:

ROI % = (Income – Cost of investment) / Cost of investment x 100%

The higher ROI, the better. E.g. ROI of 200% achieved over a year of an investment corresponds to a double return on the investment once the given period is over. If the metric is negative, it may show that within a given period of time the investment is non-profitable, even though it could bring a profit in the long run. For example, ROI of -50% indicates that within a year of the investment the project will generate loss. The investment may make a return in two years, and after three years the company will have made a 50% profit on having implemented the project.

Please, bear in mind that cutting the cost of investment, which may theoretically influence ROI favourably, may also decide the success of a given project. This stems from the fact that IT projects alike any other investment require financing such as in-service training or initial counselling by the manufacturer.

ROI in practice

Let's have a look at how ROI may be measured for a furniture manufacturer, with 70 chain-stores across Poland. Say, the company does not have a unified IT system, which could integrate data from across all the stores. This data is scattered. To prepare a sales report for the company CEO all staff need be engaged, starting with each store's sales staff, their managers, then regional managers up to the main sales director. Look at the table below:

The cost of preparing an annual sales report

Cost No. of people involved Time need to prepare quarterly report (in hrs) Cost by man-hour (EUR)* Total quarterly cost (EUR)
Sales staff 280 (4 staff in each of the 70 stores) 2 30 16 800
Store manager 70 2 45 6 300
Regional Manager 5 2 60 600
Sales Director 1 8 100 800
Total quarterly cost = 24 500 EUR
Total annual cost = 98 000 EUR
  • Cost: Sales staff
  • No. of people involved: 280
  • Time needed to prepare quarterly report (in hrs): 2
  • Cost by man-hour (EUR)*: 30
  • Total quarterly cost (EUR): 16 800
  • Cost: Store manager
  • No. of people involved: 70
  • Time needed to prepare quarterly report (in hrs): 2
  • Cost by man-hour (EUR)*: 45
  • Total quarterly cost(EUR): 6 800
  • Cost: Regional manager
  • No. of people involved: 5
  • Time needed to prepare quarterly report (in hrs): 2
  • Cost by man-hour (EUR)*: 60
  • Total quarterly cost(EUR): 600
  • Cost: Sales director
  • No. of people involved: 1
  • Time needed to prepare quarterly report (in hrs): 8
  • Cost by man-hour (EUR)*: 30
  • Total quarterly cost(EUR): 800
Total quarterly cost = 24 500 EUR
Total annual cost = 98 000 EUR

How to calculate efficiency of investment for the above mentioned company?

Period: 1 year.

Income: understood here as a saving made once the system has been implemented, which in this case is the number of man-hours devoted each year to manually key in sales data, i.e. 98,000 EUR.

Cost: i.e. how much in total did the company pay for the system automating the input of the sales data, here: 60,000 EUR.

Let's go back to the formula:

ROI % = (Income – Cost of investment) / Cost of investment x 100%

Substituting each value with our exemplary figures we get:

ROI = (98,000 EUR – 60,000 EUR)/60,000 EUR * 100% = 63,33%.

What does that mean?

ROI is 63.33 %, which means that the expected return on the investment was more than 1.5.

So, within less than a year of implementation:
- the IT system is expected to bring a return,
- the company made a profit of more than a half as much as they invested.

The above calculations present an oversimplification.

What we fail to account for is the company's ever-changing environment and the soft, i.e. intangible, benefits. The latter, though of equal importance to tangible hard effects, do not translate directly into the company's profits and, thus, are not as easily measured, which in turn, makes them irrelevant when calculating ROI.

Here are a few examples of intangible investment benefits:
-increase in the level of customer satisfaction,
-faster and more accurate feedback,
-better customer service offered,
-in- and out-going communication improved,
-a more precise forecast on the company's development.

Just as a reminder, here are a few measurable hard investment benefits:
-fewer input mistakes, which saves time (as in less man-hour is needed for a task),
-increased productivity,
-faster customer service.

ROI Calculator

Before you start your calculations ask yourself a few questions:

  1. Can I measure the expected saving/profit?
  2. Is the expected saving/profit achievable?
  3. Will the benefits of implementing an IT system be visible in more than one area of my business activity? (make sure not to count any benefits twice)

Based on our previous experience of a few hundred successfully implemented IT projects we have prepared an easy‑to‑use calculator to help you compute your ROI.

Calculate the ROI for your IT project

Wondering if your investment in IT project will pay off?
Do you want to know when it will return?
Use this calculator and increase the efficiency of your project.

Calculate

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