When an economic downturn starts to hurt, small businesses often hunker down and cut costs. But new technology solutions may be necessary for survival and growthâ€”and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, weâ€™ll review what ROI is, explain how an ROI analysis can help you save or make money, and provide guidelines for analyzing the ROI of a technology investment.
Part 3: Analyzing ROI
As we explained in Part 1 and Part 2 of this series, today, more than ever, small businesses considering a technology investment should analyze not only the costs of that investment, but
the expected ROI as well. Unfortunately, few models exist to guide you through that analysis,
and with good reason: Determining ROI involves looking at many components, then applying those components to your particular situation.
Doing this requires making many choices, so first, letâ€™s look at the things one must considerâ€”from both a cost and benefit perspectiveâ€”when considering the ROI of a technology investment.
- Your existing technology infrastructure. There are few companies without existing technologies in placeâ€”and any new solution will need to work with these systems to be effective. There will likely be costs associated with the new technologyâ€™s impact on existing systemsâ€”but there will also be benefits. For example, a new technology might offer more efficient automation of workflow or improved information collection, storage, and access.
- Your business processes. A new technology can clearly improve your businesses processes as described in Part 2 of this seriesâ€”by reducing downtime, improving productivity, and lowering costs. But implementing the new technology will likely involve training staff in using the technologyâ€”and that can have associated costs.
- Your external relationships. Finally, no business is an island: Your systems may link to customer and vendor systems. As a result, any new technology may impose constraints or require changes of external organizations or individualsâ€”in the way information is delivered or received, for example.
To solve this puzzle, it can be helpful to ask three different but related questions about the technology solutionâ€™s cost,effectiveness,andefficiency.
- Cost: Can you afford the technologyâ€”and will it pay for itself? To answer these questions, youâ€™ll need to know the cost of the solution itself and the monetary value of the resources used to implement it, measured in standard financial terms. Youâ€™ll then compare the dollar cost of all expenditures to the expected return (in terms of the projected savings and revenue increases). You may need to project the cost and return over a multi-month or multi-year time span in order to show a payback period.
- Effectiveness: How much bang for your buck will you realize? Now the analysis becomes more complex. Analyzing the effectiveness of a technology solution requires you to look at its costs in relation to how effective it is at producing the desired resultsâ€”in essence, to expand your measurement of ROI beyond cost savings and revenue increases to include performance relative to your companyâ€™s goals. To do this, youâ€™ll probably want to look at unit cost or activity cost.
- Efficiency: Is this the most you can get for this much investment? Finally, youâ€™ll want to ask whether the technology will produce the greatest possible value relative to its costs. That can present difficulties, as it will require you to conduct a similar analysis on many alternatives, perhaps simulating the performance of the alternatives in some way.
These three types of measurements differ in several ways. While the first is based simply on
Financial metricsâ€”i.e., cost in pure dollar termsâ€”the other two include production output metrics, including the quality of goods or services and customer satisfaction. These production output metrics may even extend to employee morale, or in the case of some companies (such as manufacturers of â€œgreenâ€ products or non-profits), social or political benefits.
All of these measurements, however, help you answer the same basic question: whether an economic downturn is a time to reduce technology spending, or a time to examine priorities
and decide which technology investments will pay off in the long-term.