The ROI Formula
ROI = (Total Benefits - Total Costs) / Total Costs × 100
Simple enough, but the challenge is accurately calculating benefits and costs. Here's how.
Calculating Total Costs
Initial Development Costs
- Development fees
- Design and UX work
- Project management
- Infrastructure setup
- Data migration
- Training and rollout
Ongoing Costs (Annual)
- Hosting and infrastructure
- Maintenance and updates
- Support services
- Future enhancements
Hidden Costs to Include
- Internal staff time for requirements and testing
- Productivity dip during transition
- Integration with other systems
Calculating Benefits
Hard Savings (Easy to Measure)
- Labor reduction: Hours saved × hourly cost
- Error reduction: Cost of errors × reduction rate
- SaaS elimination: Subscription fees avoided
- Paper/printing: Material and handling costs
Soft Benefits (Harder to Measure)
- Faster decisions: Value of time saved in reporting
- Better customer experience: Retention improvement
- Competitive advantage: New capabilities enabled
- Scalability: Ability to grow without adding staff
Revenue Benefits
- New revenue streams enabled
- Faster quote-to-cash cycles
- Improved close rates
- Customer retention improvements
Example Calculation
Scenario: Order Management System
Costs (3-Year View)
- Development: $150,000
- Annual maintenance: $15,000 × 3 = $45,000
- Hosting: $6,000 × 3 = $18,000
- Total 3-Year Cost: $213,000
Annual Benefits
- Labor savings (2 FTE hours/day): $52,000
- Error reduction: $24,000
- SaaS replacement: $36,000
- Annual Benefits: $112,000
- 3-Year Benefits: $336,000
ROI Calculation
- ROI = ($336,000 - $213,000) / $213,000 × 100
- 3-Year ROI: 58%
- Payback Period: ~23 months
Tips for Accurate ROI
- Be conservative: Underestimate benefits, overestimate costs
- Use real data: Measure current processes before estimating savings
- Get input: Talk to the people who will use the system
- Consider timing: Benefits often ramp up over time
- Track actuals: Measure real results after implementation
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