ROI calculations

In justifying the cost of an SLA or major capital expenditure, many managers live and die by cold, hard ROI calculations. It is part of the modern trend of ensuring that no individual can be blamed when something goes wrong – or as I like to call it, “butt-covering”. ROI has become a central financial metric for asset purchase decisions in organizations large and small.

To give you an idea of how endemic this issue is, a recent survey of IT managers, 45 percent said that senior management required an ROI on any major technology expenditure, but only 20 percent said that their organizations have strict formal ROI measurements in place for technology projects.

From the perspective of an MSP, this can be good or bad. If you can arrive at a logical calculation for your service delivery, it is dramatically easier for your proposal to be passed by the management of a firm you are pitching your ideas to. Showing the true economic benefits of an SLA in a simple spreadsheet can be a challenge though. Luckily, more and more firms are starting to recognize more components in an ROI calculation, and these components are of incredible importance to an organization. Accountants in an organization love the easy ROI calcs. For example, if a sales rep in a company drives a vehicle 40,000km each year and the sales manager is considering purchasing a new car for the rep that delivers better fuel economy, the calculation is strictly mathematical. Say the current fuel economy in the rep’s V8 pickup is 12l/100km and the potential new purchase is a Prius at 6l/100km and petrol will average $1.60/l over the next 3 years, the fuel savings will be $11,520. If the new vehicle has a changeover cost of $9,000, then it is a relatively easy argument for the sales manager to pitch at management.

Unfortunately IT rarely has such a simple mathematical calculation. It is becoming increasingly obvious in our modern finger-pointing society that having an ROI calculation is almost an essential part of your sales armory. To be successful though, you need a number of esoteric tools in your kit bag. For example, what is the value you can assign to staff morale? If a well-maintained computer system results in less frustration amongst employees, morale will be higher overall. Higher morale will lead to greater employee satisfaction which will lead to lower staff turnover and more committed and focussed employees. These are all real and tangible benefits but you will need to be somewhat creative to assign dollar values to these benefits. Perhaps you can make an assumption of simply lowering staff turnover by a few percentage points and assign a cost to the organisation each time an employee leaves. What about the benefits to one of your clients of them having highly satisfied clients. If their clients are happy, they will spend more and tell more people about their products and services. An efficient computer system can help in this equation – but again judging the exact dollar value to assign to this becomes difficult. I always believe that staff can achieve more if their computer system is faster – although some argue against me because they may have some ‘two-finger typists’ who can’t take full advantage of a faster computer system. Even if you only assign an average of five percent in a speed increase across all employees in a firm, it is amazing how many dollars this translates to in time efficiency savings when you consider the dollars per hour an employee can generate.

There are a number of different methods that can be used to calculate an ROI for an SLA and for new computer system upgrades. Some firms simply refuse to even consider a purchase or a major commitment if there is not a matching ROI assigned to that purchase. The bottom line is that you need an ROI tool that you can wrap into every proposal you submit and that ROI calculation needs to be logical and easy to understand.

Try it in your next proposal – you will be pleasantly surprised by the reaction.

Tell me your ROI on reading this article at [email protected].

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