Overview of ROI

ROI is a popular method of measuring the success of process improvements and IT investments. It is a measure of the dollars returned on dollars invested. And as Payne (1999) points out, ROI is an effective approach for arguing the need for, or demonstrating the success of, process improvements and IT investments.

Though there are a number of methods of calculating ROI, one straightforward, simple to understand method is the Benefit to Cost Ratio, which simply divides the benefits in dollars of process improvement or IT investment by the costs.

So, a Benefit to Cost Ratio of 3 would mean that for each dollar spent on the cost of process change and IT, three dollars in benefits were realized.

In doing an ROI assessment, typical sources of cost include:

• Initial IT investments

• Training staff in new processes and IT tools

• Consulting needed to assist process change and IT installation

• Recurring cost associated with new process and IT, for example maintenance

Typical benefits that are considered in an ROI assessment include:

• Increased revenue (e.g., increased sales or sales margins)

• Retention of sales that would otherwise have been lost

• Reduction in operating expense (e.g., daily time savings and eliminated rework)

In this chapter, we'll look at how to do a Benefit to Cost model for process change and IT investment of putting a requirements management tool in place in your company. Although this model was developed with the rollout of a commercial tool in mind, it should be readily adaptable to development and rollout of "home grown" tools.