ROI - Return on Investment - is a performance measure used to evaluate the efficiency of an investment. In other words, ROI helps in determining the extent of cost savings that are realized in return for use of a specific amount of money on a project. The Project Management Book of Knowledge (PMBOK) states that the project charter - a document that formally authorizes a project - must clearly state the business justification for the project including return on investment. In many companies the CFO or COO requires ROI to be presented before funding is approved for a project. The task of calculating ROI is not always easy because the cost savings of implementing a project cannot always be quantified in dollars. In many cases the benefits are intangible and non-financial as in providing a competitive advantage in the marketplace or delivering superior customer service.
It is especially important to know the ROI of a project in these times of shrinking IT budgets where many organizations are expected to deliver more services with fewer resources. Without knowing the ROI it is impossible to determine if a project was successful in meeting the business expectations of delivering increased revenues and/or reduced costs. Technology executives must be extra diligent in the ROI analysis of their projects because according to a report by the Standish Report, only 32 percent of IT projects were delivered on time, within budget and with the required functionality. Forty-four percent were delivered late, went over budget or did not meet specifications. The remaining 24% were cancelled due to unspecified reasons.
It is a good idea to follow the PMBOK rule where ROI is calculated and included as part of a project's charter document even before the project starts. This clearly establishes ahead of time any project expectations of increased revenues or other intangible benefits if the project were to be delivered on time and according to specifications. It is however not uncommon to find ROI being calculated as an afterthought to increase a project's budget or extend its life when it is running out of money and/or behind schedule.
Any ROI analysis must include the following activities (as defined by PMBOK):
- Business needs or project requirements.
- Stakeholder influences.
- Effect of the project on related business processes.
- Risk factors.
- Justification - benefits versus cost.
- Summary budget.
In its most elementary form, ROI is the ratio of expected benefits to expected cost. Therefore,
ROI = (value of expected benefits / expected cost) * 100
Knowing your ROI has some very definite advantages:
- It allows projects in a company to be compared using a common set of metrics for establishing funding priorities which in turn determines when and if a project will be green-lighted.
- It provides an opportunity to understand the impact of a project's investment cost on the company as a whole since a ROI calculation analyzes the project's effect on business processes throughout the company.
- It quantifies the business expectations from a project which in turn can be used to determine whether the project was successful.