Return on Investment

it service management

1. SIC PRESIONTATION RETURN ON INVESTMENT Pandey Abhishek TY BSC I.T. (A)

2. ROI (return on investment) is a widely used measure to compare the effectiveness of IT systems investments. It is commonly used to justify IT projects, but can measure project returns at any stage and be used to evaluate project team performance and other relevant factors. INTRODUCTION

3. Definition of ROI ROI % = (Return – Investment Cost)/Investment Cost x 100 The basic ROI calculation is to divide the net return from an investment by the cost of the investment, and to express this as a percentage. ROI, while a simple and extremely popular metric, may be easily modified for different situations. The ROI formula is: 3

4. Financial Benefits ROI on IT system projects should be based on tangible (or hard) benefits. Generally, financial benefits can be placed into five categories: 4

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7. Non-financial benefits Non-financial benefits should not be included in ROI calculations. While they are often as important as tangible benefits, they are difficult to financially quantify. Non-financial benefits should be fully explained within the business case and, where possible, details provided of any quantification or measurement. Examples of intangible IT benefits include: Increased customer satisfaction. Ability to offer improved customer service and support. Increased usability leading to increased sales. Increased user satisfaction. Improved/automated business processes that the new system supports and enables faster and more accurate information. Improved analytical solutions. Better forecasting. Better controls to improve data input accuracy. Improved software vendor support and service, improved communications, better knowledge of software, system set-up, and the like. 7

8. Calculation Considerations Relevant factors to consider in ROI calculations include 8 The timeframe for calculating ROI for IT projects may vary. Three years is common for hardware projects, as technology is often obsolete after 3 years. However, 5 or more years is often used for new software systems. Changing the timeframe can make significant differences in ROI calculations.  Try to be consistent from project to project . Timeframe : ROI calculations should be consistently applied across all IT system projects. Consistency also applies to the assumptions behind the ROI calculations. For example treatment of inflation and taxation (corporate and VAT/sales taxes). Consistency : Details shown to the last dollar or to cents lead users to believe in accuracy that does not exist. Using $000’s omitted would be more appropriate. Equally, every figure being rounded with two or more zeros may lead users to believe that calculations are fairly inaccurate. A balance has to be struck, combined with the need to be as certain and accurate as possible. Precision :

9. ROI calculations Other calculations that are typically produced at the same time as calculating ROI are: 9 the return a project will make at a specified discount rate. Ideally this should be a high/positive value. NPV (net present value) The yearly return % of the investment – the higher, the better. IRR (internal rate of return) This is normally expressed as the number of years it takes to recover the investment. The shorter the payback, the better. Payback  (also known as break even point). 

10. SIC Thank You.