How do you calculate ROI for a project over time?

The basic ROI calculation is to divide the net return from an investment by the cost of the investment, and to express this as a percentage.

Table of Contents Show

DEFINITION OF ROI
USING ROI WITHIN IT PROJECTS
ISSUES WITH USING BASIC ROI CALCULATIONS
TANGIBLE BENEFITS
INTANGIBLE BENEFITS
CALCULATION CRITERIA
SITUATIONS WHEN A ROI CALCULATION MAY NOT BE USEFUL
OTHER CALCULATIONS
How do you calculate ROI over time?
How do you calculate ROI over multiple years?
How do I calculate ROI for multiple years in Excel?

ROI % = (Return – Investment Cost)/Investment Cost x 100

Important Points about ROI are:

• Comparing the ROI of different projects/proposals provides an indication as to which IT projects to undertake.

• ROI proves to corporate executives, shareholders, and other stakeholders that a particular project investment is beneficial for the business.

• A project is more likely to proceed if its ROI is higher – the higher the better.

For example, a 200% ROI over 4 years indicates a return of double the project investment over a 4-year period.

• Financially, it makes sense to choose projects with the highest ROI first, then those with lower ROI.

Common Issues with ROI Calculations are:

ROI calculations can be manipulated if you are not careful.
Project savings, income and expenditures should be measurable and realistic.
In some cases, these measures are not easily measurable, and their realism is questionable.
Project benefits may be attributable to more than one improvement – so care needs to be taken to avoid double counting.
When forecasting costs and benefits, it is not always possible to obtain a high degree of certainty with respect to the accuracy of project costs and benefits.

Most Common Financial Benefits of the IT project which should be considered while calculating ROI are:

Revenue enhancement : After successful implementation of IT project, there will be increase in revenue (service upsell) e.g., Providing a new service that results in increased sales to new and existing customers.
Cost Reduction : IT project will reduce the cost of your business process. One example of this could be travel reduction (e.g., online meetings replacing face-to-face meetings, remote support replacing onsite support).
Cost Avoidance : This benefit will allow your organization to avoid specific costs completely. Your organization may see substantial time saved in your business process (increased productivity and reduction in time to complete tasks).
Capital Reduction : Post implementation of IT project, capital expense will be reduced. There could be lower costs for servers and storage.
Capital Avoidance : This is similar to cost avoidance but avoiding a capital expense. There could be avoidance of the planned purchase of new data center, due to innovative IT project implementation.

Apart from the above financial benefits, there could be lot of non-financial benefits as well:

Increased customer satisfaction.
Ability to offer improved customer service and support.
Increased usability leading to increased sales.
Increased user satisfaction.
Improved/automated business processes that the new system supports and enables faster and more accurate information.
Improved analytical solutions.
Better forecasting.
Better controls to improve data input accuracy.
Improved software vendor support and service, improved communications, better knowledge of software, system set-up.

There are various other ROI calculation methods such as, NPV, IRR and Payback period, which are also widely used and discussed in various Project Management seminars.

ROI (return on investment) is a widely used measure to compare the effectiveness of IT systems investments. It is commonly used to justify IT projects, but can measure project returns at any stage.

DEFINITION OF ROI

The basic ROI calculation is to divide the net return from an investment, by the cost of the investment and express this as a percentage. ROI, whilst a simple and extremely popular metric, may be easily modified for different situations. The ROI formula is: ROI % = (Return - Cost of Investment) divided by the Cost of Investment x 100 Additional definitions: • The basic roi calculation is also known as: ROR (rate of return), Rate of profit. • The return is also known as: money gained or lost on an investment, profit or loss, gain or loss, net income or loss. • The cost of investment is also known as: investment, capital, principal, costs.

USING ROI WITHIN IT PROJECTS

Comparing the ROI of different projects / proposals provides an indication as to which IT projects to undertake. ROI proves to corporate executives / shareholders / other stakeholders that a particular project investment is beneficial for the business. A project is more likely to proceed if its ROI is higher – the higher the better. For example, a 200% ROI over 4 years indicates a return of double the project investment, over a 4 year period. Financially, it makes sense to choose projects with the highest ROI first, then those with lower ROI’s. Whilst there are exceptions, if a project has a negative ROI, it is questionable if it should be authorised to proceed.

ISSUES WITH USING BASIC ROI CALCULATIONS

ROI calculations can be manipulated if you are not careful. Project savings / income and expenditures should be measurable and realistic. But sometimes they are not always easily measurable and their realism is questionable. Project benefits may be attributable to more than one improvement - so care needs to be taken to ensure no double counting. It is not always possible when forecasting costs and benefits, to obtain a high degree of certainty with the project costs and benefits.

TANGIBLE BENEFITS

IT system projects ROI should be based on tangible (or hard) benefits. Examples of tangible IT benefits (project savings / income) include: • travel reduction eg online meetings replacing face-to-face meetings, remote support replacing on- site support • time saved eg increased productivity and reduction in time to complete tasks • time saved eg from reduced length / number of customer service calls • time saved from reduced numbers of errors • time saved from improved system reliability and having less maintenance or fewer problems to resolve • time saved with improved software vendor support eg quicker responses, faster fixes

INTANGIBLE BENEFITS

Intangible (or soft or non-financial) benefits should not be included within ROI calculations. Whilst they are often as important as tangible benefits, they are very difficult to financially quantify. Instead intangible benefits should be fully explained within the business case and where possible details given of any quantification or measurement. Examples of intangible IT benefits include: • increased customer satisfaction • ability to offer improved customer service and support • increased usability leading to increased sales • increased user satisfaction • improved / automated business processes that the new system supports and enables • faster and more accurate information • improved analytical solutions • better forecasting • better controls to improve data input accuracy • improved software vendor support and service, improved communications, better knowledge of software, system set up

CALCULATION CRITERIA

The total time scale for calculating ROI for IT projects may vary. Three years is common for hardware projects, as technology is often obsolete after 3 years. However, 5 or more years may be used for a new software system. For example, a new HR system is unlikely to be completely replaced within this time scale, though likely to be kept up to date with regular maintenance. Consider calculating ROI with either quarterly or yearly timelines. Consistency: The ROI calculations should be consistently applied across all IT system projects. Consistency also applies to the assumptions behind the ROI calculations eg treatment of inflation, taxation (corporate and VAT/sales taxes). Over-precision versus overly rounded figures. Details shown to the last $ leads users to believe in a spurious accuracy, when $’000 would be more appropriate. Equally, every figure being rounded with two or more zeros, leads users to believe that calculations are fairly inaccurate. A balance has to be struck, combined with the need to be as certain and accurate as possible. Ways to improve the project ROI include: • increase project benefits / cost savings – easier to quantify, but costs can only be reduced so much • increase project benefits / revenues – harder, if not impossible to quantify – but can be much larger • decrease project costs – easy to quantify, but potentially limited • timing - deferring project costs or bringing project benefits forward Whatever changes are made, they have to be realistic and measurable.

SITUATIONS WHEN A ROI CALCULATION MAY NOT BE USEFUL

ROI may not be useful in every IT project situation eg: • expenditure such as IT consumables, replacing broken PC’s • projects that do not produce cost savings / income – as any ROI will be zero or negative • projects which only have intangible benefits and no measurable financial benefits

OTHER CALCULATIONS

Other calculations that are typically produced at the same time as calculating ROI are: NPV (net present value) ie the return a project will make at a specified discount rate. Ideally this should be a high / positive value. IRR (internal rate of return) ie the yearly return % of the investment – the higher, the better. Payback years (also known as break even point) ie the number of years it takes to get the investment back. The shorter the payback, the better. No project has an automatic right to approval and a budget. Decisions to invest in IT systems projects have to compete with all other business areas and their needs / proposals. But achieving a good ROI and high NPV / IRR with a quick payback, will put IT systems proposals to the top of any choice. For more IT project proposal information visit: Reasons for changing software / Project scope checklist / IT project proposal / Proposal format / Basic ROI calculation / ROI calculator and tips for maximising systems project ROI / Hidden costs of acquiring software / Project budget template and tips for improving IT software budgets / Proposal evaluation sheet

A review of the basic ROI calculation and its use within IT project proposals

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How do you calculate ROI over time?

Key Takeaways ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100.

How do you calculate ROI over multiple years?

Calculating Multi-Year Returns As an example, if you made $10,000, $15,000 and $15,000 in three consecutive years, adding those figures produces a total return of $40,000. Dividing this total by your original investment and multiplying by 100 converts the figure into a percentage.

How do I calculate ROI for multiple years in Excel?

This is displayed as a percentage, and the calculation would be: ROI = (Ending value / Starting value) ^ (1 / Number of years) -1. To figure out the number of years, you'd subtract your starting date from your ending date, then divide by 365.