Calculating Tech ROI

thePoint
July 22, 2005

To successfully “buy with ROI” means that organizations must have a rigorous methodology for accurately calculating the costs (initial and ongoing) of IT ownership, and for establishing measurable performance metrics at each major impact on a business process.

And according to consultants The Gantry Group LLC, the first step in this methodology is to understand—at the business process level—how a technology is going to change the operation of the business. The first question to be asked:

If we deploy this IT solution, how will we measure its impact on our business processes?

The answer to this question will lead directly to those performance metrics that best reflect the degree to which a technology is "doing its job." Identifying and later measuring the performance metrics are the trickiest part of the process.

With the business performance metrics most impacted by the technology identified, the next steps include the determination of:

• Total cost of ownership: estimate cost of initial purchase, upgrade and ongoing maintenance
• Quantified value proposition: establish a benchmark for current performance metrics and assess what kind of improvement is necessary to produce a reasonable return
• Realistic payback period: establish expectations about when the investment will be recovered

Measures of Value

When it comes to technology implementations, financial institutions are keen on determining whether an investment has created the anticipated value. Today, financial executives are concerned about the economic value induced by a technology investment not only as part of the purchase decision criteria, but also in post-implementation.

Results from Gantry's Annual Bank Technology ROI study showed user productivity and ROI to be the most common techniques for judging the success of a technology implementation. For example, large banks use ROI (69%) and Time to Payback (54%) to measure the success of their IT investments while the smallest banks focus on the more basic user productivity.

User productivity is a relatively simple-to-track statistic of throughput per individual. But what about the more elusive ROI?

Quantification of ROI or any equivalent value calculation (e.g. IRR, RVA) requires periodic measurement of the performance metrics that drive that value:

ROI = ($ Benefitl + $ Benefit2+ . . .) – Total Investment (upfront and ongoing).

Performance metrics are the business results that generate each of the associated benefits in dollars. For example, if the ROI of a cash-management implementation is being calculated, the institution must be measuring results such as customer adoption (use of self-service), customer retention, customer live call volume, operational costs/transaction, and new incremental fees.

Across all technologies, the most common metric used to measure performance is cost per transaction (80%), followed by customer retention (63%). Both of these metrics are inputs to the ROI equation: customer retention reflecting the avoided loss of revenues and cost per transaction reflecting cost savings or cost avoidance as a result of the technology implementation.

This article was prepared by the staff at the Point for Credit Union Research and Advice and is published online at http://thepoint.cuna.org/. Reprinted with permission.