ROI IN IT PROJECTS: STOP GUESSING AND CALCULATE THE REAL RETURN ON YOUR INVESTMENT

Key Takeaways

ROI in IT Projects Goes Beyond Simple Calculations

Calculating ROI in IT projects requires a deep analysis that considers direct and indirect costs, incremental revenue and intangible benefits. Ignoring these factors can lead to misguided decisions and underestimate the true value of the investment

Process Mapping and Accurate Data are Essential

Well-executed business process mapping and a robust database are fundamental for calculating ROI accurately. They allow for identifying project impacts, generating realistic forecasts and making strategic decisions based on concrete data

ROI is a Dynamic Tool for Decision-Making

ROI is not a static number but a dynamic tool that must be monitored and adjusted over time. Considering different scenarios, analyzing growth potential and reinvesting profits are essential strategies to maximize return and ensure the success of IT projects

What is ROI - Return on Investment?

ROI is one of the metrics available to evaluate the effectiveness of any investment, whether financial, marketing, specific technical projects or in any other area. ROI basically shows how much you gained in relation to what you invested.

The ROI formula is quite simple:

ROI = ((Expected Return - Required Investment) / (Required Investment) * 100

Example:

Imagine you invested $10,000 in a marketing campaign and obtained a return of $25,000. The calculation would be:

ROI = ((25,000 - 10,000} / 10,000} * 100 = 150%

This means you obtained a 150% return on your initial investment.

Some factors can make calculating ROI challenging:

• In real cases, values are not as easily identified as in the example;

• Investments must consider direct and indirect costs over time;

• Direct costs are not always analyzed considering a medium- or long-term timeline;

• ROI may be used for the approval and/or comparison of future projects and, in this case, investments and especially returns are forecasts.

In the case of a project to develop new IT solutions, taking only initial investments into account can lead to misleading comparisons between two or more options. Likewise, indirect costs, such as team time and related expenses, are difficult to attribute and tend to be neglected or underestimated.

Incremental revenues are also sometimes difficult to predict and project over time. Similarly, identifying the origin of these revenues as a specific and exclusive result of a company action—whether a marketing campaign or an IT project—can generate distortions in ROI calculations.

In the marketing campaign example, it is not always easy to attribute generated revenue directly to a specific campaign. Additionally, some marketing actions aim to strengthen the brand and customer relationships, which may not translate into immediate sales. In the case of an IT solution, attribution could be more direct if the solution provided an additional sales channel that did not exist before.

The important thing in these cases is to build a process for calculating ROI with a good database for historical analysis and comparisons, while remaining aware of the limitations in calculations for each scenario—whether due to lack of information or the difficulty of projecting it over time. The use of different scenarios considering revenue and expense forecasts and projections will surely help in decision-making and should be mapped throughout the process.

Process Mapping and ROI

Beyond good project management, your company needs to have a deep understanding of the business. Here, well-executed business process mapping allows for a detailed analysis of direct and indirect costs that will be impacted by the changes brought by your company's IT project, as well as generating more accurate forecasts and projections of tangible and intangible gains.

It is worth noting that what is considered a "good" ROI varies according to the sector, the investment risk level and investor expectations. However, a positive ROI always indicates that the investment can generate profit.

Among the factors that can and should be considered in ROI calculations, we have listed some examples which may or may not be relevant to your specific segment, but we hope they serve as a reference for your company to identify the main factors to be considered in the scope of your IT project.

Reduction of Operational Costs

Process Automation

• Elimination of manual and repetitive tasks, reducing the need for personnel in these activities;

• Reduction of human error and rework, avoiding losses and unnecessary spending;

• Agility in processes, allowing the company to do more with fewer resources.

Optimization of Resource Use

• Better inventory management, avoiding losses due to obsolescence or product shortages;

• More efficient use of energy, water and other resources, reducing costs and environmental impact;

• Optimization of delivery or logistics routes, decreasing transportation expenses.

Waste Reduction

• Minimization of raw material, product or time losses, increasing production efficiency;

• Reduction of spending on corrective maintenance through preventive and predictive maintenance;

• Elimination of waste in administrative processes, such as excessive paper use.

Management Efficiency

• Better control of information and data, facilitating strategic decision-making;

• Fast and easy access to reports and indicators, allowing for the identification of bottlenecks and improvement opportunities;

• Integration of different systems, avoiding data duplication and streamlining processes.

Revenue Increase

Improvement of Customer Experience

• Faster and more personalized service, increasing customer satisfaction and loyalty;

• Availability of new communication and sales channels, expanding the company's reach;

• Ease of use for products and services, encouraging purchase and continuous use.

Increased Productivity

• Tools and systems that facilitate employee work, allowing them to do more in less time;

• Automation of repetitive tasks, freeing employees for more strategic activities;

• Better management of projects and tasks, ensuring that deadlines are met and objectives are achieved.

Innovation and New Products

• Development of new solutions and services that meet market needs;

• Creation of differentiated products that add value to customers and generate additional revenue;

• Access to new technologies and tools that enable the creation of innovative products.

Market Expansion

• Access to new geographic markets or customer niches, increasing sales potential;

• Creation of new product lines or services that cater to different audiences;

• Strategic partnerships with other companies, expanding brand reach and visibility.

Other Factors

Risk Reduction

• Implementation of security systems that protect company and customer data and information;

• Prevention of workplace accidents and occupational diseases, avoiding costs related to leave and compensation;

• Better risk management in projects and processes, decreasing the probability of losses and damages.

Improvement of Company Image

• Adoption of sustainable practices that reduce environmental impact and improve company reputation;

• Investment in social projects that benefit the community and strengthen the company's image;

• Creation of a pleasant and motivating work environment, attracting and retaining talent.

It is important to emphasize that estimating the annual savings generated by a software development investment is a complex process that requires careful and detailed analysis of various factors. It is recommended to involve professionals from different areas of the company, such as IT, finance, marketing and operations, to ensure all relevant aspects are considered.

Furthermore, it is essential to use accurate data and information to support estimates, such as cost history, sales projections, market research and benchmarking with other companies in the sector. The more accurate the information, the more reliable the annual savings estimate will be and the easier it will be to calculate the investment's ROI.

Common Errors in ROI Calculation

By understanding ROI as a dynamic and effective metric for the comparative analysis of investments and projects, we can always avoid falling into common errors. Let's look at an example.

Imagine a retail company starting its sales business with an online store as its only sales channel. It invests $100,000.00 to set up its web store. In the first year, sales are $1,000,000.00 and the profit from those sales is $100,000.00. When analyzing the ROI of the investment in the online store, can one conclude that it is 0% in the first year? No. We explain why.

ROI = ((Expected Return - Required Investment) / (Required Investment) * 100

ROI = (($100,000 -$100,000) / $100,000) * 100 = 0%

In the online store example, the ROI analysis in the first year presents a crucial flaw: considering only net profit as the return on investment. ROI is a metric that evaluates the total return on investment, and in the case of the online store, the return is not limited to net profit.

Other important factors:

• Brand value and customer base: Beyond generating profit, the online store is also building brand value and a loyal customer base. These intangible assets are difficult to quantify but represent an important return for the business. The developed solution may prove to be a significant market differentiator;

• Learning and improvement: The first year of operation generates learning and allows for the improvement of processes, marketing strategies and platform functionalities. This experience contributes to growth and increased ROI in subsequent years;

• Growth potential: The online sales market is constantly expanding, and the online store has the potential to increase its sales and profitability in the coming years. This growth perspective must be considered in the ROI analysis;

• Consider all costs involved in the project, from initial expenses for creating the online store to annual operational costs such as marketing, maintenance and logistics;

• Develop methods to quantify intangible benefits, such as brand value, customer satisfaction and acquired learning. Use surveys, interviews and data analysis to estimate the value of these benefits;

• Evaluate ROI over a broader time horizon, taking into account the growth potential of the business and the benefits that accumulate over the years.

Considering the online store example again, with an initial investment of $100,000.00, sales of $1,000,000.00 and profit of $100,000.00 in the first year, let's analyze the ROI over a 5-year period, taking into account the aforementioned factors and adopting some realistic hypotheses.

1. Sales growth: The online store shows an annual sales growth of 20%, driven by the increase in the e-commerce market and brand consolidation.

2. Stable profitability: The profit margin of the online store remains at 10% of sales over the 5 years.

3. Operational costs: Annual operational costs (marketing, maintenance, logistics, etc.) correspond to 5% of sales.

4. Additional investments: The online store makes additional investments of $20,000.00 in the second year and $10,000.00 in the fourth year to improve the platform and expand its operations.

Results Projection

Year	Sales	Gross Profit	Operating Costs	Net Profit	Additional Investment
1	$1,000,000.00	$100,000.00	$50,000.00	$50,000.00	-
2	$1,200,000.00	$120,000.00	$60,000.00	$60,000.00	$20,000.00
3	$1,440,000.00	$144,000.00	$72,000.00	$72,000.00	-
4	$1,728,000.00	$172,800.00	$86,400.00	$86,400.00	$10,000.00
5	$2,073,600.00	$207,360.00	$103,680.00	$103,680.00	-

ROI Calculation:

• Total investment: $100,000.00 (initial) + $20,000.00 + $10,000.00 = $130,000.00

• Accumulated net profit: $50,000.00 + $60,000.00 + $72,000.00 + $86,400.00 + $103,680.00 = $372,080.00

• ROI (5 years): $\frac{372,080.00 - 130,000.00}{130,000.00} \times 100 = 186.22\%$ (equivalent to 23.40% per year)

In this scenario and considering a 5-year period, the online store presents an ROI of 23.40% per year and not the 0% initially assumed, indicating a significant return on the initial investment. This result reflects consistent growth in sales, maintenance of profitability and the execution of strategic investments to improve the platform. In the investor's case, they take into account the investment period and not just the first year.

• Intangible benefits: Beyond financial return, the online store provides important intangible benefits, such as brand strengthening, customer loyalty and continuous learning about the market and consumer behavior.

• Alternative scenarios: It is fundamental to analyze alternative scenarios, considering different growth rates, profit margins and operational costs. This analysis allows for evaluating investment risk and making more strategic decisions.

• Reinvestment: Profit generated by the online store can be reinvested in the business to accelerate growth and generate even higher returns in the future.

And how can you improve the ROI calculation while simultaneously enhancing your business knowledge?

• Define clear goals: Have specific and measurable objectives for each investment.

• Analyze data: Use data to identify improvement opportunities.

• Test different strategies: Don't be afraid to experiment with new approaches.

• Monitor performance: Closely track the results of your investments.

• Be patient: ROI is not always immediate.

If you want to better understand evaluation criteria to help choose between off-the-shelf and custom ("tailor-made") solutions, check out our whitepaper "Maximize Results: Planning and Implementing the Best IT Solution for Your Company" and make safer and more informed decisions.

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