The primary focus of ROI is on the required level of investment. There is an optimum level of investment in each asset for a given business unit, at a given point in time, that helps maximise profits. This cost-benefit analysis assists organisations in determining the rate of return that can be expected from various investment proposals. This enables organisations to select an investment that will improve both divisional and organisational profit performance while also allowing for the effective utilisation of existing investments. Return on investment in business takes two forms, depending on when it is calculated: anticipated ROI and actual ROI.
Future Processing recently hosted a roundtable event that provided an opportunity for industry experts to exchange ideas and offer valuable perspectives on this topic. Rowan Jackson, Co-Founder and Chairman at Promising Outcomes, Eric Moe, Chief Operating Officer of Whitefoord LLP, and Daria Polonczyk, Head of Analysis & Design at Future Processing participated in the discussion.
Anticipated Versus Actual ROI
Anticipated ROI, also known as expected ROI, is calculated before the start of a project and is frequently used to determine whether the project is worthwhile to pursue. Anticipated ROI calculates how much profit a project is likely to generate based on estimated costs, revenues, and other assumptions. This figure is frequently run through several different scenarios to determine the range of possible outcomes. They are then used to assess risk and, ultimately, to determine whether an initiative should proceed. The true return on investment generated by a project is known as the actual ROI. This figure is typically calculated after a project has been completed and uses final costs and revenues to determine how much profit a project produced in comparison to what was estimated.
Considering Costly Changes
While change is a constant, the cost of change during a project is anything but. While projects are designed to be completed as soon as possible, there are several reasons why organisations should make changes sooner rather than later. There is no code during the design process. This means that making a change takes little time and money. Typically, designs can begin on paper, allowing for dozens of iterations. Dislike the design? Change it. It doesn’t have to be your judgement only. Hi-fidelity prototype can be tested with user representatives – you can gather feedback from the market and make sure you are on the right track to customer satisfaction. It is simple to change the flow of a product or how a feature works at the beginning of a project. During development, organisations begin writing code for a product and making changes become more complex. Any updates now may necessitate changes to both the design and the existing code. Furthermore, businesses will have to re-test changes with users which may even cause other parts of the application to fail. All of this adds up; changing something during development is significantly more expensive than changing something during design.
Once a product has been delivered, several changes will likely be required. These changes are especially difficult because developers must not only change the design but also spend time updating the code and re-testing. Furthermore, they may need to change how data is structured, which will necessitate the creation of scripts to move data around in a live environment. Another costly side effect is that organisations may need to re-train and re-educate users on how to use the product. Depending on the severity of the change, the cost and time to implement could be nearly twenty times higher than if the changes were made at the start of the project.
Costs should not be cut during the pre-development phase because this part is critical. Cutting costs is sometimes necessary, but it is not always the best solution. A company may choose to cut costs to increase profits, but if the activity has other effects on a project’s operations, such as adversely affecting the business in the long run or negatively impacting sales, the cost savings may not be able to justify the negative impact. Many times, project managers use cost-cutting as a quick fix rather than addressing the root cause of the problem.
End-Users Remaining a Priority
While anticipated ROI is not an exact science, as it relies heavily on assumptions, team leaders can combine intuition and reliable data to verify business decisions. Focusing on the end-user is imperative, as improved UX increases the adoption rate by 20-70% and creates cost savings in terms of support. Customer expectations are increasing so customer service needs to move in line with this. Massive amounts of change occurred in the wake of COVID-19 – and the effort of organisations have once again shifted from surviving to thriving.
A separate cost that must be considered is the unwanted (and un-tracked) cost due to errors, re-work and waste. The average for this type of cost in most organisations is 35% of the total running costs of the organisation. One of the roundtable members worked some years ago in a financial services company where the estimated level of re-work was 80%, an unwanted and untracked cost in those days (1990s) of £170m per year. While automation, RPA and other digital interventions can reduce this unless the organisation has a robust approach to continuous improvement it will never reduce this cost. In terms of the CX, re-work, waste and errors can reduce the degree that customers trust the company, thereby reducing loyalty, advocacy and profits. While errors may not manifest themselves internally, they certainly do so to the customer. They are also a major factor in increased employee turnover, another untracked and unwanted cost. Employees frustrated by having to re-work activities or deal with errors soon get frustrated and leave.
Earlier is truly easier, and the earlier an organisation makes changes to their product, the faster and less expensive it can be completed. Late-game adjustments simply cost money. Organisations save money and time by investing more time upfront. Using hard data and quantifying cost and revenue with ROI is a fool-proof way to measure project success at any stage, reduce costs early on, and gauge the long-term efficacy of an investment.