When I am conducting a product evaluation, there always seems to be a stumble at the end of the process; hence, a Return on Investment (ROI) analysis needs to be created.
Here are the top five helpful hints I use with clients:
1. Having friends in helpful places
Yours will not be the first ROI developed. Others in your organization have done this and very successfully. Do not attempt to re-invent the wheel here. Start within your department to see if there are successful examples of ROI. If so, study these and use them as the basis for your analysis. If the person who developed the successful ROI is still with your company, search them out and ask for some pointers (what they would have done different, issues they had with approval, etc.)
If you cannot find anyone in your department, connect up with someone in the Finance group. There will certainly be someone there who has done this before and can help you. I have seen instances when the Finance group was also doing an ROI for a technology purchase, and HR and Finance combined their projects to help with an even better ROI. But remember that someone in Finance will be a great help during this entire process.
2. Never enter a battle you cannot win
Getting a project approved, particularly in our current economy, is a much larger challenge than if the economy was booming. Dollars for projects are limited and getting the funding dollars released for your project could have many difficulties. Begin to assure your success by knowing who you will need to present the ROI to get the funding approved.
Once you know the people that will have the final approval, you need to begin to educate them about your project and its benefits. If you know these people before the discovery stage, you may want to include an interview with them to get their input on the types of data and information they need to run the organization. If they feel they have had some input into your solution, you may have a better supporter.
Have a champion. This is a person who will lobby and work with the Executive Team members to push your projects. Often, this will be your Vice President. Keep this person informed about the project and have them review the ROI numbers before they are finalized. This is a busy person, so do not plan to use them to create the ROI, but review and approve.
3. Understand what can be included
This may seem a bit basic, but each company has their own rules and regulations on the types of data which can be included on an ROI. If you are unsure if you company has any directives, start with the VP of HR to see if you can get any guidance. If not, see if someone in your financial reporting group can provide you with insight to what is included. They usually handle this type of data frequently.
Usually, we always see Direct Costs (hard dollar) savings being included. These are savings which can be directly tied back to the new solution. Such examples are a reduction in overtime, or the better ability to track on control shift differentials.
Sometimes you can include Indirect Cost (soft dollar) savings. *Be careful with these as many companies will limit amount and types of soft dollar savings, which can be included in an ROI. Examples of these would include the elimination of a future position if the system is purchased. This is soft dollar, as the position is not currently occupied and your assumption is that you would get approval to hire. While the actual approval could be denied or delayed, this would be considered soft dollar.
4. Quantifying ROI Savings
Hard Dollar savings are easy to quantify as they are usually a known current expense. One warning on hard dollar is to be very careful in using staff reduction in your justification. Often you will see a change in the type of staff members you may have, but in many cases you are replacing front-line data entry type employees with more analytical people which are a more expensive resource. Staff savings are usually minimal.
If you can use Soft Dollar, your ROI analysis will be much easier. Here, you can use and quantify current staffing increases as the company grows to a minimum. Before you start any Soft Dollar analysis, remember to put together your assumption for the calculation in case you get asked later. Work with your full team to uncover all the potential Soft Dollar savings. You will be surprised on how many there can be.
Be sure to also include Cost Avoidance estimates. These are Soft Dollar savings but very specific. For example, if you were looking for a new time and attendance system, cost avoidance would be a better calculation of overtime hours. Ascertain what the fines would be for every incident. Multiply the number of incidents you assume per year that you could be experiencing with your current system and you have the annual cost avoidance.
These can become very large numbers depending on the area and how much governmental impact exists. Remember this may not just be a federal governmental issue, but include any state, city or local impact.
5. Using and presenting the ROI data
You will ultimately be presenting your analysis. This is usually done in a Business Case. It could be a written document or presentation depending on your company standards. Regardless of the type of final format, remember you are usually presenting to senior executives who want a 50,000 foot overview of the project, process and costs. They may ask more specific questions so have all your data organized to find any answers you may not have immediately.
Keep the ROI numbers also at high level. They will be interested when the investment will begin to show a positive return and how your solution will assist in them making decision to run the company.
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