Calculating the ROI of a Technology Investment, The ROI Series—Part 2: Cost savings are usually important to small businesses even in the best of times. New technology solutions may be necessary for survival and growth, however—and they may not be as expensive as you think when you consider their return on investment (ROI). In this four-part series, we’ll explain what ROI is, help you understand indirect ROI, and provide guidelines for predicting and measuring the ROI of a technology investment.
PART 2: The Indirect Benefits of Technology Implementation
It’s easy to see the direct benefits of new technology, such as reduced headcount or increased revenues. That’s because they show up as line items on financial statements. But it’s also important to consider the indirect benefits: an ROI that cannot be easily quantified but is nonetheless realized.
A good example of an indirect ROI is employee productivity. When you implement new technology, employees can perform their jobs better and faster. For example, an application that facilitates better communication between attorneys and clients at a law firm may not generate a direct return by reducing head count, but it can significantly improve the quality of service clients receive while giving attorneys more time to focus on value-added tasks, such as sales. That, in turn, will increase clients and profits—a very clear indirect return.
All technology generates some indirect returns, but how much is direct and how much is indirect? One research firm found that direct returns account for only half of technology ROI. Less than 50 percent of companies that implemented a document management system saw a direct ROI, while 84 percent saw an indirect ROI in the form of measurable increases in employee productivity.
To determine how much of a proposed implementation’s ROI is indirect, you must consider three key factors: the kind of technology being implemented, the areas in which it will be implemented, and your current IT environment.
Indirect ROI may not be readily visible, but it is critical to driving business value. A business that ignores indirect ROI, choosing not to improve its technology because there is no direct ROI, will not be able to keep up with competitors.
In the next part of this series, we offer specific tips for predicting ROI.