Overview
Most people are familiar with the term ROI (return on investment). Whether you’re investing for retirement, in a new venture, or a major purpose, ROI is a common way to evaluate the return from that investment in the form of larger revenues or less costs (ideally both!). Often businesses have several projects to choose from when looking to improve their operations, and ROI can be a good way to objectively compare the options. In this article, we’ll briefly touch on how ROI is often calculated, and then offer two other ways to look at evaluating decisions and investments: COI (cost of inaction) and ROC (return on change).
Calculating ROI
ROI calculators generally show the investment amount and expected amount of revenue growth, or expected amount of cost savings. Revenue growth is generally used for marketing or sales force initiatives, whereas cost savings are used for just about everything else. We’ve got a nice and simple ROI calculator on the XLEV8 add-in page that covers the cost savings aspect (also displayed in the screenshot above).
There are generally three outputs analyzed:
- ROI in $: dollars saved minus dollars invested
- ROI in %: dollars saved divided by dollars invested
- Payback period: dollars saved (or gained) divided by how long it took to break even (expressed as days, weeks, months, or years)
In the screenshot above, the ROI $ is calculated as $290,812.50 worth of time saved less the investment of $8,000, for a humungous $282,812.50 in ROI $. The ROI % is calculated as the $282,812.50 ROI $ divided by the investment of $8,000, for a massive 3,535.2% in ROI %. The payback period is calculated as the investment of $8,000 divided by the weekly time savings of $7,500 (50 people x $40/hour average wage rate x 125% to include benefits x 3 hours saved per week), for a payback period of just 1.1 weeks. Those are pretty incredible returns – not something you’d typically see, but when looking at the cost of labor – usually the highest cost in your business – it doesn’t take much time savings to add up quickly!
Calculating COI
While ROI can be extremely helpful, it’s based on an expectation – an unknown with the best assumptions we can make. Here’s another approach to it with a different spin: COI (the cost of inaction). It’s pretty simple – it’s the cost of doing nothing. Using the ROI example above, it’s $290,812.50 – the value of time being wasted today.
Why is that powerful? Because we know that’s the case now. We know we can resort back to that if we need to. The question really is whether we can live with it. When you’re talking about saving time, it’s usually a matter of insufficient capacity for getting everything done, or no time for anything else: important projects that get pushed off, a lack of analysis, or so much overtime that people burn out and leave.
COI focuses on the pain and emphasizes the potential solution as a painkiller rather than a vitamin. As most doctors will tell you, painkillers tend to sell a lot better than vitamins! That’s not to say that vitamins aren’t valuable and necessary, but the perceived urgency just isn’t as strong.
Calculating ROC
When you look at COI, it can be eye-opening. At the end of the day, it’s about opportunity cost. When you think about all the time you’re wasting and how it could be better spent, it makes the alternatives seem pretty appealing. What people often don’t take into account are the intangible benefits that come along with positive change – team morale, reputation, confidence, and unlocking creativity. Those are difficult to quantify, so they’re often left off of ROI calculations.
It’s often a worthwhile exercise to look at what you’ll do with the time you expect to save and the capacity you’ll unlock, if nothing else, to have a plan and goal in place. Even better if you can quantify it and tack it on the the value you expect to get from it.
If you’re evaluating an investment that will result in more revenue, how will the expected additional income be spent? Will it be reinvested into the business or distributed to investors? Maybe it’s a little bit of both.
Here’s a realistic example that encompasses all of the above. By leveraging a solution that saved several hours a week, a financial analyst was able to build a report that showed the best vendors with the lowest prices and most reliable deliveries for a restaurant chain. By shifting 25% more orders to this vendor, reputation was enhanced, leading to more revenues, lower costs, and time freed up by the restaurant staff in managing issues. That’s the return on change when you can focus effort where it’s impactful. It’s sometimes hard to quantify, but it’s extremely valuable.
Summary
ROI calculations are an extremely effective way to identify worthwhile investments. It appeals to our analytical senses. Just because the numbers make sense though doesn’t mean the ultimate decision makers that write the checks will take action. COI is a great way to appeal to our emotional sides. If nothing else, it gets them to thinking that there are probably much better ways to spend time and money. Combine that with ROC, where you look at what you’d do with the time you save or the additional growth you experience, and you’ve got an extremely compelling business case. Throw in a clear, proven plan for success, and that’s how you instigate positive change.
What are your thoughts on ROI, COI, and ROC? Please share your thoughts in the comments below!
Recent Comments