May 26, 2011
Homefield IT
The ROI Series: Calculating the ROI of a Technology Investment—Part 2. Cost savings are usually important to small businesses even in the best of times. New technology solutions may be necessary for survival and growth, however—and they may not be as expensive as you think when you consider their return on investment (ROI). In this four-part series, we’ll explain what ROI is, help you understand indirect ROI, and provide guidelines for predicting and measuring the ROI of a technology investment.
PART 2: The Indirect Benefits of Technology Implementation
It’s easy to see the direct benefits of new technology, such as reduced headcount or increased revenues. That’s because they show up as line items on financial statements. But it’s also important to consider the indirect benefits: an ROI that cannot be easily quantified but is nonetheless realized.
A good example of an indirect ROI is employee productivity. When you implement new technology, employees can perform their jobs better and faster. For example, an application that facilitates better communication between attorneys and clients at a law firm may not generate a direct return by reducing head count, but it can significantly improve the quality of service clients receive while giving attorneys more time to focus on value-added tasks, such as sales. That, in turn, will increase clients and profits—a very clear indirect return.
All technology generates some indirect returns, but how much is direct and how much is indirect? One research firm found that direct returns account for only half of technology ROI. Less than 50 percent of companies that implemented a document management system saw a direct ROI, while 84 percent saw an indirect ROI in the form of measurable increases in employee productivity.
To determine how much of a proposed implementation’s ROI is indirect, you must consider three key factors: the kind of technology being implemented, the areas in which it will be implemented, and your current IT environment.
- The kind of technology being implemented. While all technology provides some indirect ROI, some technology generates more. For example, supply chain software can improve productivity, but most of its ROI is direct, in the form of reduced inventory and transportation costs. On the other hand, collaboration software may have a huge impact on worker productivity by reducing the time it takes to execute group-oriented tasks, such as sharing information and coordinating meetings. Likewise, content management systems tend to generate significant indirect ROI by leading to faster filing and decreased retrieval times.
- The areas in which technology will be implemented. Where and how you deploy technology will also impact the portion of its ROI that is indirect. As an example, consider a business intelligence dashboard. Depending on how it is used, ROI could be more direct or indirect. If it is used to give a logistics manager the ability to better monitor and control transportation costs, the ROI is primarily direct. If it is used to provide financial analysts with quicker access to monthly metrics, the primary benefit will be time savings, an indirect ROI.
- Your current IT environment. Finally, the extent to which a new technology’s ROI is direct or indirect may depend on how much change the technology leads to. Consider an application that tracks employee hours. A company that has manually collected time will see significant direct ROI in a reduction of the number of timekeepers needed. On the other hand, a company that already has an automated attendance process will see more indirect ROI in the form of efficiencies through time savings.
Indirect ROI may not be readily visible, but it is critical to driving business value. A business that ignores indirect ROI, choosing not to improve its technology because there is no direct ROI, will not be able to keep up with competitors.
In the next part of this series, we offer specific tips for predicting ROI.