Today more than ever, decision-makers must make the most of scarce resources and at the same time respond to ever-increasing demands for improved performance and new technology. These competing demands generate close scrutiny of proposals for new technology investments. Many technology investment planning processes require some analysis of the costs and returns expected from the proposed investment.
In general, there are four types of questions that prompt or drive an ROI analysis: financial, effectiveness, efficiency, and impact.
Financial: Can we afford this? Will it pay for itself?
Answers to these questions are based on expected savings and revenue increases compared to the dollar cost of all expenditures on the new technology.
Effectiveness: How much “bang for the buck” will we get out of this project?
How much does this investment contribute to achieving program goals and producing the desired results? Consider direct, indirect, and opportunity costs.
- The indirect costs include such things as training and administration over time.
- An opportunity cost could be the loss of return or revenue you would have received had you chosen a different alternative.
- The measurement of returns will be expanded beyond cost savings to include levels of performance relative to program or project goals.
Efficiency: Is this the most we can get for this much investment?
This question requires information about the greatest possible value relative to its costs. Efficiency cannot be separated from effectiveness.
Impact: Will the benefits of the technology justify the overall investment in this project?
Measures are based on the specific program result desired.
There is no single “right” way to conduct a return on investment analysis. Focus on the strategic objectives of the analysis along with the goals and business processes of the proposed technology project.