ROI Analysis

A basic overview and case analysis for managers.

Jul 20, 2007 Linda Banks

This case analysis showcases how an ROI analysis can be used without being too complex or overshelming to the manager.

ROI stands for Return On Investment. Simply put – it’s a method of analysis that will help you determine if purchasing something is worth the cost by taking into account both initial costs and ongoing costs. In the example below, a simple decision must be made on whether to purchase a new piece of software or not. The software costs $250,000 initially but the software vendor promises increased efficiency and sales.

These efficiencies will allow the company to release multiple contractors doing very manual work. The sales will increase because the customer service representatives will be able to better serve the customer and provide more opportune options for purchasing.

The first action to take is to identify your baseline. Make a note of just how much money is spent on contractors and just how much current monthly sales are. Then, by using analysis of similar companies purchasing the same product, determine what the gains and costs should be over a length of time. As each month passes, replace the estimated numbers with the actual numbers to compare how good the estimated numbers were.

What’s important is to keep track of cumulative totals. Because there are initial costs – such as the quarter million for the software as well as recurring costs of labor and maintenance, it is important to keep a running total month over month at least until you hit your breakeven analysis. Most companies will keep a running total for longer than that, but knowing how long it took to recoup the initial investment will give every manager a better understanding of investments versus returns over the long haul. It also helps the company understand which software vendors are the most reliable and factual during their sales pitch.

It’s not only important to keep the ROI analysis for financial reasons; it can help the manager understand other, non-financial, aspects of their business. Each manager gains a better understanding of how the internal process flow works by understanding labor costs per unit, supply purchases and sales detail. It always helps for managers to understand their top sellers and the methodology that brings in better sales. In addition, those who are not top sellers might be hampered by a loop in the process that is better re-engineered to be more effective and efficient.

ROI analysis can become extremely complex and cumbersome. For larger companies with many attributes, these are invaluable tools. However, even a simple analysis of one or two aspects within your control will help one become a better manager and will allow one to showcase your results and accomplishments with firm data.

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