Crystal Reports Administration: ROI Calculations

We'd love to be able to provide you with a simple form that calculates your ROI for any product of ours. Many companies provide ROI calculators, presumably to help you develop that badly needed ROI number. Those companies are not doing you any favors.

Those ROI calculators shortcut the process and provide a number that has only the appearance of accuracy and reliability.

Don't those calculators, if you value your reputation and/or the financial performance of your company. Read on to find out why using those is a bad idea and what you should do, instead.

Let's start off with a classic example. Suppose you drop something small but expensive, while walking along a fairly dark city block at night. What should you do?

A. Walk down to the corner where the streetlight is, and look there because the light is better.

B. Painstakingly comb the area where you dropped the object, because that's the only place you'll find it.

If you chose answer A, congratulations. You are now qualified to be a politician.

To calculate ROI and come up with a figure that has any validity, you can't just plug in a few numbers because it's easy (light is better). You have to painstakingly comb through things to find what really matters. You need to determine your outflow and your inflow:

Outflow (costs):

• Costs of acquiring the asset (may be fixed and/or variable). Normally, this is the sale price paid for the asset.

• Costs of putting the asset into use (may be fixed and/or variable). For software, this will include such things as training, additional hardware resources, integration with existing software, and adaptation of work practices. This may also include installation downtime.

• Maintenance costs (usually variable, but may be fixed by contract). The software vendor may not have any hidden costs or maintenance costs, but such costs might arise for you on your own side. For example, if you have high turnover, then training new people in this software becomes a maintenance cost.

Inflow (returns):

Most people slumber through this part, kind of as an afterthought. They've decided on the purchase and now are trying to backfit the financials to justify it. Instead of doing that, try to see how the purchase might maximize each of the items below. For example, going with the premium version might cost more but provide far better ROI. Think about where the purchase can increase inflow or decrease outflow.

• New revenue gained. With BI software, the ability to identify untapped sales opportunities is big. Very big. To figure out how big this is in your organization, you'll have to talk to your sales people.

• Improved performance. Many good projects have been nixed because they "don't increase revenue." But that perception is due to the failure of the ROI analyst to properly quantify the results of better performance. Better performance can be leveraged into greater revenue. Talk to operations people and get some numbers.

• Reduced costs of operation. Quantify this. By how many dollars will costs drop?

• Reduced costs of maintenance.

You will also need to express ROI in terms that make sense to the right people:

• For managers, use MRR. Why: Managers want to see a rate of return on investment.

• For financial people, use NPV. Why: Businesses live or die on cashflow.

Coming up with an ROI number without going through the steps above is pretty much a waste of time. Those steps are the basis for cash flow analysis, and conducting that analysis is a requisite step for calculating MRR or NPV. That's one reason so many people prefer to calculate "payback," which is a very misleading number. A good ROI report will leave "payback" out, because it is essentially non-information.

A good ROI calculation is never simple. But a bad ROI calculation can be worse than useless and make you look that way, too.

What about the actual ROI formulas? You'll find these in Excel. They are too complicated to do by hand. If you're going to do serious ROI work, then you need to pick up a book that details ROI and cash flow analysis. A business calculator typically comes with such a book.

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