It's natural to get excited about the latest technological breakthrough. When a new device or a new piece of software comes out, you might be tempted to purchase it immediately. But constantly purchasing new technology can exhaust your budget if you're not careful.
Instead, you'll need to think about tech return on investment (ROI) so you can make better, more financially sensible decisions.
How do you do it?
The Basics of ROI
Return on investment (ROI) is a concept usually relegated to the world of financial investing. It’s designed to help investors determine how valuable one or more of their investments has been.
For example, if you invest $10,000 into an index fund and it grows to $20,000, you could see an ROI of 100 percent if you choose to sell; you gained $10,000 on your initial investment of $10,000.
If we can learn to see our potential technology acquisitions and current technology stacks through the same lens, we can learn to make much more effective decisions. For example, if we know our maintenance system offers a significant ROI, we can feel comfortable keeping it or expanding on it. If we see a negative ROI in a different software system, we can feel comfortable eliminating or replacing it.
ROI in technology is valuable because it’s:
· Objective. For starters, ROI is a fairly objective measure. In the course of estimating ROI, you might be forced to make some assumptions or guesses, but this measure is much more reliable than any gut feeling. Instead of purchasing or implementing a new technology simply because it seems cool, you'll be doing it because you anticipate a measurable return on your investment.
· Consistent. This is also a consistent measure that you can apply to all technologies that are relevant to you. It's very difficult to compare two software platforms that do totally different things, but it becomes much easier when you have a measurement that applies to both equally. For example, can you say that your project management platform is more valuable than your cloud storage platform? You might be able to make this assessment if you calculate ROI for both.
· Actionable. ROI is also an actionable measure, meaning it can drive you to make a decision or take a specific action in a favorable direction. If you have a negative ROI for a piece of software you use regularly, you can cancel your subscription with confidence. If there's a positive ROI, you can justify keeping it.
So how do we calculate ROI for a piece of technology?
ROI in Technology: Considering Value
One side of the ROI equation is your return, or the value you get from technology. You can think of value in many different ways, including:
· Revenue. Does this software enable you to generate revenue that you otherwise wouldn't? For example, let's say you've historically made 100 new sales every month, but after introducing a new sales platform, that number increased to 150 new sales every month. You can attribute 50 sales each month to the sales platform directly; calculate this out, and you can figure out how much revenue is being generated by your software.
· Cost savings. You can also think about any cost savings provided to you by this platform. As a simple example, if you paid $500 a month for 5 different platforms (at $100/mo. each), but you replaced all of those with a single platform that did the work of all 5 for $300 a month, you can think of this piece of software as saving you $200 a month (assuming these platforms are necessary).
· Time savings. Does this technology save you time? If so, how much time does it save you and how much value does that time have? If you make $100 an hour and this technology saves you 10 hours a month, it hypothetically saves you $1,000 every month.
· Innovation/new capabilities. Does this technology enable you to do something that you couldn't do before, such as offering a new product or service to your customers? This needs to be integrated into your equation as well.
ROI in Technology: Considering Costs
You'll also need to consider the costs of your technology. In other words, what does it take to integrate this technology or keep it up and running?
Consider:
· Money. The obvious variable to study here is money. How much did you pay and how much are you paying for this technology? It may grant you $10,000 a month in benefits, but if it costs $11,000 a month to maintain, it’s not worth it.
· Time. Time costs are also important. How much does it take to maintain and use this platform? How long does it take for users to learn?
· Risk. Are there any additional risks or vulnerabilities introduced by this new technology? Find a way to estimate the dollar value of these risks.
Making More Effective Tech Decisions
With every new piece of technology you consider adding to your portfolio, you should conduct a thorough analysis to determine its potential ROI. Yes, there will be some variables that you can't identify or measure, as well as some risks and costs that may only rear their heads later. But if you can think more critically about how and why you use technology, you'll be in a much better position to operate profitably.