The art of RoI
Return on Investment (RoI) is something that we all love to see. It’s the distillation of all the time and effort put into a project (or proposed for a project) into a nice, easy-to-understand number: ‘We spent $1,000 on our streamlining project and got $10,000 back.’ That’s $9,000 profit, well done, chalk that up and remember it when you’re negotiating your salary.
RoI is more an art than a science. If the money is spent on a BPM project that has delighted the customer, surpassing expectations, they might come back and want to buy more, which means your $9,000 profit is an underestimate. If your project has merely dumped the processing work on your customer and driven them to a competitor, your $9,000 (and more) might have to be spent acquiring new business.
Let’s take a tour of the Acme Widget Company to see how they are wrestling with the question: can you put a price on RoI?
What does it cost?
This is the most straightforward way of calculating RoI for a project. Alison, COO of Acme Widgets, has put together a list of the costs involved in her BPM project on the production line:
- Cost of the BPM software
- External consultant
- Training course costs
- Time of staff members on the course
- Time spent explaining the project to C-suite, and the staff affected
… this can get pretty deep. Does Alison include the costs of tea and biscuits for the external consultant’s visit?
A decision also needs to be made on whether the cost is considered as separate from the normal operations of the business or could it be included in what the company was going to spend anyway? If a manager can complete an online course around their regular work without any loss of productivity (now if that doesn’t suggest a crying need for BPM, nothing does) or staying late, has it really ‘cost’ the business anything beyond the cost of the course?
At some point, Alison needs to stop thinking of items to write in the ‘cost’ column before getting as far as costing the time to calculate costs. Settle on a sensible and moderate framework for your estimate without factoring the electricity costs of boiling the kettle after a training session.
What does it yield?
Before Alison’s BPM project, Acme Widgets turned out products that cost $3 to make: $1 in raw materials, $1 in labour, $1 in everything else - infrastructure, maintaining the factory, taxes, employee perks and flowers in the board room (but not including Alison’s BPM project, which we’ll consider separately).
Selling at $4 per widget, the business made $1million profit last year.
After the BPM project came online, the time spent making each widget by each worker halved. And so, the figures break down as follows:
Raw materials: $1
Infrastructure etc: $1
If the company sells the same number of widgets at the same $4 price point, the profit leaps up to $1,500,000.
Let’s say Alison’s BPM project cost $10,000; our final total profit is $1,490,000 – so the Direct RoI is $490,000.
We need to incorporate other factors:
- Does Acme Widgets make twice as many widgets or halve their workforce?
- Could they sell twice as many widgets if they made them?
- Could staff be redeployed in the business, or could the business make
Despite keeping the numbers deliberately simple, there are already enough ‘unknown unknowns’ to make calculating a simple RoI very tricky.
We are now looking at Indirect RoI.
Good BPM software should be able to help with the calculation of how much a business is saving with each refinement of the process: removing duplication and eliminating waste are obvious wins. Following the improved process, however, raises questions for strategy of the business as a whole: is one department suddenly much more efficient than another?
Does supply meet demand? Acme Widgets, for example, send most of their product to Beta Automobiles. If Acme doubles production, Beta aren’t going to double their order (unless they implement a BPM program of their own).
A BPM system that enables Alison to track and report on time and resources allocated to manufacturing is going to be very important if she has any chance of nailing down exactly what her changes have done for the organization. If Acme Widgets find themselves in a competitive bidding war, they need to know exactly what their capacity is – or risk being signed to a deal they can’t afford, if not losing the deal to a competitor who has a better idea of their margins.
What about risk?
The final part of the puzzle is Risk Reduction. Alison’s BPM project has identified a process that carried a small amount of personal risk to the worker. This was quickly put right. If we imagine a ‘sliding doors’ scenario, Acme (1) (with BPM) is more efficient, and has reduced risk of injury to their workforce. Acme (2) (without BPM) could be the scene of an accident that temporarily closes the factory down – and has a knock on impact to the business as a whole.
Businesses have a traditionally uneasy relationship with risk – whether this is physical harm, financial risk or operating in a volatile market. A pub that shows a football game may consider paying to screen the match plus extra staffing costs and clean up a fair price to pay for increased custom; a supermarket near the football ground may choose to close their doors on match days to protect their stock.
There's more to RoI than meets the eye. For Alison, and Acme Widgets, the implementation of BPM has been extremely positive, but it’s hard to put a precise number on what the benefit has been.
What’s the takeaway?
RoI on any business project is difficult to calculate, but it is worth getting a model that gives you a clear picture of the benefits accruing to your business. Data is king here; the more information you have on your business processes, the better they can be streamlined and the more agile you can be as an organization when it comes to pitching for business, investing in further improvements. Data can further drive efficiencies and deepen your understanding of how a business operates, leading to greater productivity, higher efficiency, and a leaner structure over all.