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How Should You Evaluate Return on Investment for IT projects?

How Should You Evaluate Return on Investment for IT projects?

Return on investment, or ROI, is one of the most important considerations to make when tackling any new technology project. What exactly do we mean by ROI?

Generally meant is this – what return am I going to see on this investment, and how long will it be before the benefits outweigh the costs? It can be a complex question, but it’s one that’s important to ask. Without a thorough assessment, you can’t be confident that a product or project is right for your business.

Assessing ROI

Any assessment of ROI must evaluate benefits and costs. The biggest mistake in most ROI assessments is this: businesses often underestimate project costs.

This happens because they fail to take into account what is known in IT as total cost of ownership (TCO). TCO includes not only the direct and immediate cost of a new IT system, but also what expenses it will incur in the long run.

Make sure that your assessment includes labor and maintenance costs, the costs of any associated management or service contracts, as well as usage costs. Often overlooked is what is sometimes called “adhoc discretionary spending” – the expense of the additional projects that often accompany a large IT investment, such as adding new features or deeper integration six months or a year from now.

Remember to assess both tangible and intangible costs and benefits. Tangible items (such as a direct saving when a new system costs, say, $5,000 a month to run instead of $8,000) should always figure more heavily in your evaluation than intangible benefits that you can’t price.

What’s Acceptable?

Of course, it all depends on what you’re looking for, but for most IT projects, an ROI of between 12 and 18 months is considered a fair payback. On bigger projects, such as infrastructure deals, a reasonable ROI can stretch out to two years. The closer the project gets to its point of positive return, the faster it should be delivering its returns.

Improving the Equation

The ROI equation is affected not only by the technology you’re introducing, but also the current state of your business. The best time to achieve good ROI is usually at the end of a refresh cycle when your current equipment can be depreciated. Moving offices or establishing a new location also tends to tip the ROI equation in your favor.

Investigate What Your Vendor Tells You

Because there’s no standardized way of calculating ROI, it’s important to carefully research any ROI assessments that potential IT providers offer you. Examine carefully which costs they’re including in their equations and whether the benefits they’re suggesting you’ll achieve are reasonable. They’re not out to dupe you (many will in fact deliberately present a conservative case), but they don’t know your business as well as you do, specifically the precise productivity, efficiency or other dividends you may gain.

The Promised Best Isn’t Always Best

Finally, keep in mind that the solution that promises the best ROI won’t always be best.

There will always be providers out there who are willing to do things very cheaply, and their ROI equations will hide the fact that their solutions are inferior.

Be sure that in addition to presenting a positive ROI case, your IT vendor is one who you’re confident will deliver. IT projects always work best where there’s a long-term relationship in which both parties have “skin the game”.

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by Kurt Magnus // Kurt Magnus is a creative writer and content strategist who helps people succeed at self-education, writing, motivation and more by sharing with them his knowledge. He works as a content manager for Tutoriage. He is also an active guest writer on many websites.

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