Office Memo 1
Office Memo 1
13 September 2002
Return on investment (ROI) explored
It's rare to come across an ROI case that, when scrutinised, turns out not to be based on slanted figures, selective omissions, dubious assumptions or all three.
Anyone who has worked in an IT function will be familiar with the ritual dance called 'project justification'. In this, virtually any kind of capital expenditure has to be argued solely on the basis of cost displacement. Often, it must be reducible to a Return on Investment (ROI) figure. All the other motives that might apply, such as gaining customers or improving products, are dismissed with the pejorative label, 'soft savings'. (There is more than a touch of machismo evident here.)
In this universe, only so-called 'hard' savings are valid. But the problem is that often any direct savings are too meagre to support the investment on their own. This is frequently so even after the customary inflation of the size and speed of arrival of the benefits and the setting to one side of the human and organizational costs of the change (normally huge). To make their case, therefore, project analysts are obliged to drag in almost anything that might, by hook or by crook, be quantifiable.
Classical return on investment arithmetic takes the expected daily time saving from using a new system and multiplies it by the weighted salaries of the people affected and by the number of working days in the year. The product of these numbers is then presented as being the total saving for the organization.
These savings are often no more than nominal. Two conditions must be satisfied before they can be regarded as real:
- each individual time saving must be large enough for some other piece of work to be done in that period
- there must be some certainty that the time released is spent on doing that something useful.
The only 100 per cent safe way of finding out the latter is by measuring the 'after' as well as the 'before' situation. Post-implementation reviews are a common way of determining this. If that seems over-officious, or a sledgehammer to crack a nut, one could instead assume that, if the people involved in the new system are busy, honest and sensible, they will put the time savings to good use.
There are some published case studies that base their ROI calculation on time savings of a few hours in a year. One German case, used to promote a groupware product, was costed on an annual saving of five hours! This equates to about a minute and half a day. Nothing useful could consistently be done in so short a time; it is at the level of noise.
In a previous occupation, I imposed an arbitrary lower limit on admissible time savings of twenty minutes a day. Anything less than that was not counted, on the grounds that if it was that hard to make the case the proposed investment was probably not worth making. Although, perhaps, brutally simplistic (and certainly unpopular), this prevented the kind of straining at gnats exemplified by the German case.
If you have to resort to such desperate stunts to make a case, it cannot be worth making. At best you will achieve cost shaving, not cost saving.
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Roger Whitehead
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Copyright Roger Whitehead, 2002. I hereby assert and give notice of my right under section 77 of the Copyright, Designs and Patents Act 1998 to be identified as the author of these publications.
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