When was the last time your business made a significant investment?
Committing to a major expenditure can be quite daunting, especially if you have to sign a long-term contract. For example, switching to a new CRM, changing contact centre software, leasing office/factory space, or buying new hardware.
How exactly do businesses, particularly SMEs, make the best decision for the future of their business and avoid making investments which will deliver poor value for money?
Calculate the ROI!
Here are six simple steps to performing an awesome return-on-investment calculation before committing to a major investment. We’ll look at the decision-making process as a whole, since your ROI calculation is only a small part of the broader evaluation of your different options.
1. Establish your needs
Think about this: why exactly are you planning to make the investment?
In most cases, hesitation arises when the potential change is something which could potentially improve business outcomes but won’t always be necessary to ensure the firm’s survival. Remember though, you can’t afford to stagnate and become bogged down in inefficiency.
The reason you need to think about your needs as a first step is because it’s impossible to establish an ROI figure without it. If purchasing a new software solution for example, you need to define when exactly you will make the change, to ensure that you can calculate the exact impact on your bottom line over time.
Establishing the why behind the change also forces you to think about the problem the investment will solve, and what the specific benefit of fixing this issue will be for your organisation.
2. Define tangible benefits
This is the easy part!
Create some forecasts for key KPIs after the change has been implemented. Consider immediate impacts as well as long-term outcomes.
For example, how many minutes per day of time could be saved by switching to a top-of-the-line CRM? Note that sometimes it’s only possible to have a rough idea of these outcomes. In these situations, you may be able to ask for some guidance from the vendors you’re considering.
When purchasing enterprise software in particular, suppliers can help you in the ROI process. However, it’s always a good idea to question how they came up with the numbers they did – the process should be completely transparent.
3. Define intangible benefits
Sometimes you can’t put a number on the benefits of a new investment. While your bottom line will ultimately be affected one way or the other, different factors can come into play, making it almost impossible to predict outcomes ahead of time.
Your job is to apportion some notion of tangible benefit to these intangible results. At the very least, note them down as a part of your ROI evaluation, and paint a broad picture of how the change will impact your business processes as a whole.
For example, having a more streamlined ticketing system could cut your average response time by 40 minutes for example, not just making staff more efficient but also improving your customer experience. Map all these impacts out in order to better understand them.
4. Shop around
Notice that before going to market, you’ve already defined your needs and figured out exactly what you want?
This helps to eliminate solutions which won’t necessarily solve your problems or deliver better outcomes, so that you don’t have to waste time talking to vendors who won’t be able to help you.
Come up with a shortlist, and identify the strengths and weaknesses of each option. Do your research – this is what ultimately separates a good buying process from a great buying process.
5. Understand the cost
In as much detail as possible, plan out expected costs of your new investment over the next 12-24 months, comparing the different options on the market. Compare these figures to those of your existing solution, if one exists. This allows you to establish a breakeven point, or a point where the new solution becomes cheaper on a per-period basis.
Sunk costs can prove a major sticking point when making large investments. If you’re replacing something you’ve already spent a lot of money on (like running your own servers vs moving to a data centre), this is something you need to think about.
However, you also need to consider that over the long run, in the software space in particular, legacy systems may cost much more to maintain than switching to a new solution. You not only need to consider the ongoing costs associated with each, but also what your existing asset(s) may be worth if they were to be liquidated.
6. Finalise your decision
How do you rest easy, knowing that you’ve made the best-possible decision – either finding the right solution, or not proceeding with the investment at this point in time?
You need to have as much information as possible to inform the decision-making process. Of course, you won’t be able to perfectly predict absolutely everything. But if you have, at the very least, a sound understanding of what your options are, you can be more confident that you’re making the best-possible decision.
No investment is certain to deliver an incredible return. But as long as you get the ROI process right, you’re halfway to making a great decision in allocating your firm’s limited resources.