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ROI Basics (The ROI Series—Part 1)

Calculating the ROI of a Technology Investment, The ROI Series—Part 1: Cost savings are always important to small businessesbut that doesn’t mean you should skimp on technology. New technology may be necessary for the survival and growth of your business, and may not be as expensive as you think when you consider its return on investment (ROI). In this four-part series, we’ll explain what ROI is, help you understand the types of ROI, and provide guidelines for predicting and measuring the ROI of a technology investment.

PART 1: ROI Basics

There are two ways to look at the value of technology: total cost of ownership (TCO), which quantifies only the cost of a project, and return on investment (ROI), which quantifies both the cost and expected benefit of the project over a specific timeframe.

Traditionally, businesses have used TCO when analyzing the cost of internal infrastructure projects such as upgrading an e-mail system. But even with internal systems, ROI can be a better method. If your old e-mail system goes down, for example, your sales team can’t contact customers electronically and must spend more time making phone calls. If your employees spend two more hours on calls than they would on e-mails, you’ve actually lost money by not upgrading your e-mail system.

As an example of how ROI works, consider the case of a small, high-end electronics boutique. The current point-of-sale (POS) software is beginning to show strains from the company’s expansion and increasing inventory, and customer service issues are arisinga problem since the company’s mission is to provide exceptional service. The company’s owner believes implementing a new POS software program will help address these issues, but deploying it will be costly.

The key question is which will cost more in the long term: spending the money to provide a solution, or the losses the boutique will incur by not doing so?

That question may be easier to ask than to answer. As important as determining ROI is, there is still little consensus about how to measure it accurately. That’s because ROI has many intangiblesthings that don’t show up in traditional cost-accounting methods but still maximize the economic potential of the organization, such as brand value, customer satisfaction, and patents.

In the next part of this series we’ll discuss these intangibles

Published on 19th May 2011 by Jeanne DeWitt.

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