The ROI Series – Calculating the ROI of a Technology Investment – Part 2

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.