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 growth—and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, we’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 2: How ROI can Justify a Technology Purchase
In Part 1 of this series, we examined the basics of ROI—and also noted that ROI is in the eye of the beholder because it has many intangibles. This month, we’ll go into more detail about the different ways a small business can realize a ROI on technology investments—even in an economic downturn, when the conventional wisdom is to cut expenditures.
There are three ways that a technology investment can pay off:
- Reduced downtime. Some downtime is clearly associated with lost revenues: When your website is down, for example, revenue will be lost as a result of customers not being able to place orders. But when internal computers and networks fail, employees are idle—and this, too, could ultimately cost you money. Businesses that have upgraded and efficient IT systems, and those that have managed services vs. a break/fix model (also known as service on demand), simply have busier employees—and busier employees bring in more revenue.
- Increased productivity. Technology allows employees to do more work in less time. For example, a new database management application might improve timely access to accurate information (which would result in less time spent searching for data) or reduce errors (which would result in less time spent revising work or handling customer complaints). Or, a network with remote connectivity might result in less lost time when employees are traveling,
- Lower costs. Technology allows small businesses to spend less. For example, a new inventory management application might reduce inventory costs. A new teleconferencing system might reduce travel costs. And a new process management system might reduce headcount, which can lead to lower labor costs.
Just how much could you benefit financially from a technology solution? As just one example, Microsoft surveyed 25 small businesses that used Microsoft Windows Small Business Server 2003, a network operating system that provides small businesses with secure Internet connectivity, an intranet, file and printer sharing, backup and restoration capabilities, a collaboration platform, and more.The average cost of the package was $11,650—which included $3,341 in hardware, $2,003 in software, $4,561 in installation, and $1,477 in downtime, plus incremental support. The 25 users surveyed saw a payback of total costs in just 4.9 months. The total average annual benefits were $40,409 and total three-year benefits were $121,227. The software resulted in an average ROI of 947 percent, with some companies realizing a ROI of as much as 2,000 percent.
Getting at those numbers, however, may be the greatest challenge of ROI analysis. Because ROI is not one simple thing, there isn’t one simple way to measure the costs, returns, and benefits of a technology solution. In Part 3 of this series, we’ll look at the many different questions one must ask during a ROI analysis.
Cost savings are usually important to small businesses even in the best of times. New technology solutions may be necessary for survival and growth, however—and they may not be as expensive as you think when you consider their return on investment (ROI). In this four-part series, we’ll explain what ROI is, help you understand indirect ROI, and provide guidelines for predicting and measuring the ROI of a technology investment.
PART 2: The Indirect Benefits of Technology Implementation
It’s easy to see the direct benefits of new technology, such as reduced headcount or increased revenues. That’s because they show up as line items on financial statements. But it’s also important to consider the indirect benefits: an ROI that cannot be easily quantified but is nonetheless realized.
A good example of an indirect ROI is employee productivity. When you implement new technology, employees can perform their jobs better and faster. For example, an application that facilitates better communication between attorneys and clients at a law firm may not generate a direct return by reducing head count, but it can significantly improve the quality of service clients receive while giving attorneys more time to focus on value-added tasks, such as sales. That, in turn, will increase clients and profits—a very clear indirect return.
All technology generates some indirect returns, but how much is direct and how much is indirect? One research firm found that direct returns account for only half of technology ROI. Less than 50 percent of companies that implemented a document management system saw a direct ROI, while 84 percent saw an indirect ROI in the form of measurable increases in employee productivity.
To determine how much of a proposed implementation’s ROI is indirect, you must consider three key factors: the kind of technology being implemented, the areas in which it will be implemented, and your current IT environment.
- The kind of technology being implemented. While all technology provides some indirect ROI, some technology generates more. For example, supply chain software can improve productivity, but most of its ROI is direct, in the form of reduced inventory and transportation costs. On the other hand, collaboration software may have a huge impact on worker productivity by reducing the time it takes to execute group-oriented tasks, such as sharing information and coordinating meetings. Likewise, content management systems tend to generate significant indirect ROI by leading to faster filing and decreased retrieval times.
- The areas in which technology will be implemented. Where and how you deploy technology will also impact the portion of its ROI that is indirect. As an example, consider a business intelligence dashboard. Depending on how it is used, ROI could be more direct or indirect. If it is used to give a logistics manager the ability to better monitor and control transportation costs, the ROI is primarily direct. If it is used to provide financial analysts with quicker access to monthly metrics, the primary benefit will be time savings, an indirect ROI.
- Your current IT environment. Finally, the extent to which a new technology’s ROI is direct or indirect may depend on how much change the technology leads to. Consider an application that tracks employee hours. A company that has manually collected time will see significant direct ROI in a reduction of the number of timekeepers needed. On the other hand, a company that already has an automated attendance process will see more indirect ROI in the form of efficiencies through time savings.
Indirect ROI may not be readily visible, but it is critical to driving business value. A business that ignores indirect ROI, choosing not to improve its technology because there is no direct ROI, will not be able to keep up with competitors.
In the next part of this series, we offer specific tips for predicting ROI.
