Businesses around the world spend $4 trillion dollars on tech every year.
Some of that money is investment in hardware. Other budget dollars go to software solution and security. Even more is spent on IT management.
Many CIOs and IT managers find it difficult to make a business case for investing in technology. One of the best ways to make your case is to prove ROI.
One question is how to calculate ROI percentage for your tech investments. These seven tips should make it easier for you to calculate ROI and show exactly why investing in new technology will pay off for your business.
1. Start with the Basics
Calculating ROI for technology investments uses the same formula as ROI on other investments. The formula is simple enough:
- (Gains – Costs)/Cost * 100 = ROI
That is, to find your return, you’ll need to estimate your gains. Then you subtract the costs and divide over the costs. To find the percentage value, you’ll multiply by 100.
A stock market example makes this easy to see. You buy a share in a company for $100. In a year, your share has valued to $200.
You’ll subtract the cost of the share from the gains. Then you’ll divide that over the cost of the investment. For this example, the ROI is 100 percent.
Technology can be a bit more difficult to see, because it’s often harder to draw a direct line between “gains” and the investment in technology. These tips will help you more accurately estimate gains for your technology investments.
2. Factor in Costs Reductions of New Technology
The first thing to consider when trying to estimate the gains you can achieve with new technology is cost reductions.
Cost reductions are any savings you see because of the new technology. One example is lower energy costs. With new laptops, your energy bill will fall.
Those savings can be tied directly to investing in new devices. The energy savings you see thus represent a “gain” from investing in the new laptops.
Other cost reductions can be a bit more difficult to pin down. Consider higher employee productivity and efficiency. Both of these factors can result from giving employees new tech that lets them complete tasks faster.
In turn, your staff spends less time on various tasks, which could result in an overall reduction in labor. You may not need to schedule as many people in the tech department. You might even be able to reduce your head count.
By doing so, you can reduce business expenditures on wages. Investing in AI would be a great example of how this works. The AI could take over many menial tasks from your team, allowing them to focus on other areas of their work.
With their to-do lists reduced, you may not need as many hands on deck. The AI has now saved you money by letting you reduce hours or the number of workers.
3. Add in Revenue Enhancements
By investing in technology, many business leaders hope to enhance their revenue. This can happen in a few different ways.
First, the new technology may make your team more efficient and productive. That is, they can get more done. When they get more done, you’re better able to meet demand.
An example is a service business. With AI handling repetitive tasks, team members can spend more time on client calls. In turn, suppose they’re able to handle 10 customer calls an hour, up from 7 without the new technology.
This expanded capacity allows you to grow your business, without adding any new team members. In turn, revenue grows.
New technology may also help you make more sales. For example, you might be able to use AI technology to improve your ad campaigns. This, in turn, helps you increase sales and revenue.
Harder to estimate is the value of technology in improving customer satisfaction. Happy customers are repeat customers. Repeat customers are more valuable for your business.
Being able to deliver better service or segment your marketing campaign can improve satisfaction. In turn, you may see your revenues rise.
4. Look for Cost Avoidances
Next up on the list of factors to consider in your calculations are cost avoidances. Cost avoidances are related business expenses you can avoid by using the technology.
An example is a reduction in travel expenses by opting to invest in digital conference technology. Your sales team no longer needs to travel across the country to meet up with you, and you don’t need to reimburse them for flights, hotels, or meals.
Another good example is IT maintenance. Older systems tend to take more to maintain, especially if you’re using legacy systems. You may be able to eliminate the costs associated with older technologies entirely.
Of course, IT maintenance will still be needed. You may not need to maintain a particular machine or buy certain supplies after making the switch.
5. Factor in Changes to Capital Expenses
Once you’ve looked at cost reduction and avoidance, it’s time to look at changes in your capital expenses. You may notice reductions or even expenses you can avoid by introducing new technology.
An example might be the ability to reduce the number of servers you have. If you use server space more effectively, then you can reduce or eliminate the capital expenses.
A good example of capital avoidance is investing in better cybersecurity. With better security, you can reduce the likelihood of a breach and lessening the impact of one. By doing so, you can avoid the costs associated with data breaches.
These particular “gains” can be difficult to measure. You may only be able to estimate how much you’re likely to save by avoiding a data breach. There’s also the possibility that one may still occur in the future.
The same is true of savings associated with servers. You might be able to reduce the number of servers, but you may not be able to accurately predict by how many. There may also be costs associated with the servers that are difficult to predict.
The best advice here is to use conservative estimates. Data breaches can be quite costly, so you might be tempted to include the average cost of one as a “gain.” That can certainly make your ROI percentage look quite nice.
It can also skew the numbers. A conservative estimate helps make your numbers more realistic.
6. Look for Deals to Improve ROI Percentages
The reason you need to justify spending on technology investments is that they can be quite expensive. Upgrading your entire server farm isn’t a small proposition. If you have 50 employees, then getting 50 brand-new laptops is going to take a chunk out of your budget.
That’s why it also pays to look for deals on whatever technology you’re hoping to invest in. By doing so, you can lower the initial cost outlay. That, in turn, increases the ROI percentage of the gains.
You may be able to find deals designed for businesses like yours, such as bulk discounts on laptops. You can find more info about laptop deals from various manufacturers.
7. How to Calculate ROI Percentage for the Lifetime of the Device
Finally, you’ll want to take a look at the bigger picture. Most businesses don’t replace laptops every single year. In fact, you’ll likely depreciate your technology investment on your taxes for the next few years.
You’ll probably calculate the costs of your new tech over its lifespan. That is, if you plan to use your new laptops for five years, then you’ll calculate the cost of them over the next five years.
You should also look for an average return on investment over that period as well. This is more difficult to estimate, because you’ll have to guess at continued gains and cost reductions.
Generally, you can assume your gains will be largest in the first year, and you’ll see diminishing returns after that. If you expect a big bump in productivity the first year, you probably won’t see it the second year.
Increased revenue may be the same. You may see a huge jump in sales the first year. After that, increases will be smaller.
You can take factors like energy savings and reductions to servers and factor them over the same length of time. Once you’ve done this, you can determine average ROI per year.
Having these extra numbers can make a much better case for investing in new technology.
Get the Insight You Need to Grow Your Business
Now you know how to calculate ROI percentage for your technology investments. With this knowledge, you can make a stronger case for investing in new technological solutions.
Making the right technological investments can help you grow your business. If you’re looking for more business insights from the top minds, you’re in the right spot. Check out more of our featured articles, as well as the latest episodes of the show.