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ROI (Return on Investment) Calculations

on Information Technology (IT) Projects

Benefit From Gray Arrow Kaytek IT - ERP Consulting Insights

Firstly, it needs to be specifically mentioned that an ERP investment is increasingly becoming a business Decision, more than just a Technology Decision.

Hence, it is not just the CIO or CTO that will make the ERP Technical and Commercial Decisions.

It will increasingly be the CFO and the CEO. International Trends highlight an increasing Percentage of IT Decisions being made by non-IT 'C' level Executives beyond the CIO and CTO.

Some of the more enlightened organizations are also involving the CKO (Chief Knowledge Officer) in their IT Decisions because IT Penetration increases the Knowledge Levels in an Organization.

Many large Western organizations have appointed the COO (Chief Outsourcing Officer) because of increasing Outsourcing and Offshoring of their IT facilities and investments.

At a SAP India Summit customer panel discussion a few years ago, there was no clear-cut answer as to the vexed ERP ROI question. This was shocking considering large investments made by these companies.

Gray Arrow You may also read Missing SAP ROI's ?

To throw some light on the same, our thoughts for computing an IT (including ERP) Project's ROI Estimation in a 3 Step Process are mentioned below :

3 Step Process for an IT Project's ROI Estimation

IT Project's ROI =

Total Return / Total Investment

Incremental Returns & Investments as pertaining to People, Technology & Facilities to be expressed in Amount ($ or Rs) Terms over the IT project's estimated life (except where stated).

For all the financial calculations for Returns or Investments across different time periods, appropriate Net Present Value (NPV) discounting to be done.

Down Arrow 3 Step ROI Process Gray Arrow 4 Return and 2 Investment Components.

A Kaytek Viewpoint - IT Project's ROI 3 Step Process

Gray Arrow Step 1 - Computing Total Investment

Total Investment = Money Investment + Time Investment

Money Investment = Initial One-Time Costs + Recurring Expenses

Time Investment= Time (expressed in Money Terms) spent by the Organisation's people in utilising the technologies and making processes work.

All above investments to be calculated over the estimated life of the IT project.

Gray Arrow Step 2 - Computing Total Return

Total Return =

Money Return + Time Return + Knowledge Return + Brand Return

Each of these four Return Components for the Organization are explained briefly below :

Square Separator Money Return - Increased Cash-Flows due to either Increase in Revenues or Decrease in Expenses directly or indirectly attributable to the IT Project.

Square Separator Time Return - Time saved by Organisation's People in their Personal lives expressed in Money terms after Project Implementation is completed. This has to be estimated for whatever is shorter - person's work duration with the Organization after the IT project start or the IT project's estimated life.

Square Separator Knowledge Return - Increase in the Knowledge of the People within the Organization due to their Expertise gained due to the Exposure to the IT Project Implementation.

Square Separator Brand Return - Increase in Value of the Organisation's Brand - It's Image in the minds of it's critical Stake Holders (Previous, Current and Future). These are The Organization's Owners, Customers, Suppliers, Employees, Regulators, Competitors and the rest of Society.

The above 4 Return Elements are also inter-related to Each Other.

Gray Arrow Step 3

Computing IT Project's ROI = Total Return / Total Investment

Beyond financial returns on investment, many ERP projects help increase other forms of Non-Financial Non-Traditional Intangible Capital, many times much more than the measurable financial returns.

The Definition of Return in ROI must include non-financial forms of return, to make it easier to quantify the success of IT projects.

However, the bottom line is Money !

Coins in our pockets jingle !

Thoughts in our heads are silent, they do not make a noise externally !

Unless, there are simple methods available to express non-financial capital in easy to understand money terms, companies would not be in a position to easily measure returns from IT projects.

Gray Arrow Overview of the above 3 Step ROI Process is available as a Single-Page Adobe PDF Document for qualified customers.

Kindly contact us for a copy with your complete organizational details.

Gray Arrow For additional perspectives on the above, you may also refer to a media interview of Kaytek Consulting Director Mr. Mahesh Khatri.

Gray Arrow Related : What is the average life of an ERP ?

Gray Arrow Email Us : Can Kaytek assist in your ERP ROI Workings ?

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Last Updated on 3rd January 2009.

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