Workscape Institute

In my first post on ROI, I provided some general guidelines for conducting a thorough and focused analysis.  These included the crucial question:

• “Is a formal ROI analysis necessary for support and approval of the proposed project?”

Assuming that the answer to this question is yes, a first step in outlining the ROI process is to identify the areas to focus on for your particular vertical or process.  There are different ROI models and approaches for different situations and the methodology used for the calculation of the ROI will be a reflection of who is conducting the analysis and what their purpose is. 

Follow up:

When evaluating benefits administration options, for example, the ROI analysis must focus on four key areas - the technology infrastructure, the organizational structure, the business processes, and outside vendor relationships.

1) Technology Infrastructure
With respect to the technology infrastructure, the analysis will be different depending upon the starting point.  Is the current functionality supported by in-house systems, installed software, or vendor-hosted applications?  There are acquisition or implementation costs, support and maintenance costs, and license or service fees that need to be quantified.

2) Organizational Structure
Is the investment being evaluated for an enterprise-wide solution or is it one that is limited to a specific department, business unit, or function?  From the organizational perspective, the ROI must consider human resources that may be eliminated or redeployed as a result of the investment, which will be different depending upon the scope of the solution.  In any event, the “costs” of human capital must include not only cash compensation, but the fully “burdened” costs of benefits, rent, utilities, phones, furniture, equipment, IT support, professional services, and other allocated expenses.

3) Business Process
From a business process standpoint, the ROI must recognize whether the proposed solution will address current inefficiencies, redundancies, and operational gaps.  I’ve found that before and after process flow charts can help identify how the investment will affect existing operational procedures.

4) Vendor Relationships
One way or another, existing relationships with outside vendors or service providers will likely change as a result of any shift from the status quo to a new administrative solution or approach.  Even if some of the vendors that support the activities do not change, the way in which the company interacts with those vendors might.  A perfect example would be health care carriers for employee benefits, where the responsibility for providing eligibility and enrollment information, as well as premium billing and reconciliation, may shift from internal resources to an external provider.

The keys under any model or approach are to:

1. Be as objective as possible when considering the inputs into the calculation and 
2. Use a relatively conservative lens when envisioning the way things will be and work after implementation of the proposed solution.

Ultimately, the ROI analysis needs to demonstrate expected savings (and/or revenue increases) compared to the dollar cost of all expenditures on the new solution.  Generally accepted accounting standards and practices should be applied and the costs and savings should be projected over a multi-year time span to show a payback period for the expected life of the solution or term of the contract.

There is no need to break out into a cold sweat when you hear someone ask about ROI.  The good news is that you can generally obtain the data you need to quantify the current state from your company’s “number-crunchers,” who will often be delighted to assist you in your quantitative analysis.  Further, many vendors will also be more than willing to offer advice and guidance, and perhaps even provide an ROI worksheet, to help you build the business case for change.

In the end, the ROI process helps you and your management team make informed decisions about where to invest scarce dollars and how to obtain the biggest bang for the buck.  It’s all about calculating the value.