Calculating ROI (Return on Investment) on IT Projects

All IT decision makers have been faced with the question "Is this project worth it?" or better yet "What is this project worth?".

Getting the answers to these questions is vital to establishing the IT priorities for your organization. Attributing a value to each project in your portfolio will make it much easier to see the "Golden" path forward for your organization, and ensure that you are a good steward of the IT budget you control.

The traditional formula for a single period of time is

return on investment = (gain from investment – cost of investment) / cost of investment

Simply put, if you spend $25k and gain $25k you have achieved 0% ROI, not good. If you spend $25k and gain $50k you have achived 100% ROI, this is the direction we want to go.

In this equation we have two components

  • Cost of investment - This is generally easy to understand. It is comprised of known data points like salaries, equipment, vendor bills, software licenses, etc.

  • Gain from investment - This is more challenging and often relies upon forecasts, estimations, and other potentially nebulous factors.

While determining the gain from investment is more difficult it is still worth establishing even if it is imperfect. Consider the following questions.

  • Does this investment increase my capacity? Seek to quantify into units, current and anticipated increase.

  • What is a unit of capacity worth? What did it cost to create? What are you able to earn with a unit of capacity?

  • Does the investment remove manually work? How much? What is the cost of labor to cover this work?

  • Does this investment add a product to my offerings? What is the expected margin, and conservative sales forecasts?

Don't forget to add a follow up reminder in your calendar to review you ROI model at a time when you will have real data to measure the actual ROI verses the estimated ROI. Don't sacrifice the good for the perfect. You might never get a perfect model, but as you repeat this exercise you can develop better models.

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