ROI in IT projects – significant contributing factors
Return on investment, otherwise known as ROI, is a metric that is used to help companies calculate the profitability of a particular investment by comparing how much the investment costs versus how much they will earn from it. Understanding this figure allows businesses and investors to evaluate the efficiency of the investment.
ROI is often seen as a key performance indicator that helps to determine the overall business success, or the success of a particular investment. It helps companies to make good, well-informed decisions when it comes to future investments, as well as budgeting for efficiency, planning attainable goals and knowing when to pivot and adjust their business strategy.
ROI is very important when it comes to IT projects and software development, as it helps to understand the impact of investments which pave the way for successful projects. Of course, some business aspects are easier to quantify than others (for example, a short-term marketing campaign versus a complex technological investment). Understanding ROI effectively can be tricky, but there is undoubtedly a significant skills gap in the market in this area.
Internally, organisations do not have sufficiently skilled practitioners who are able to do it [measure and manage ROI]. I don’t think they have the capability or focus, and therefore, I believe that if you scrutinise the business case for many company’s projects, they don’t pass muster.Simon ScarottConsulting Director and Business Advisor
At Future Processing, we carried out a detailed ROI in IT Projects report [see below], which looked in depth at ROI. We conducted a wide-reaching survey and spoke to a number of industry leading experts on the topic and found that understanding ROI alone was not sufficient – there are other significant contributing factors that influence ROI to a greater or lesser extent. Which factors were identified as important varied according to the industry and business focus of the survey respondents, but in general, there was an overall consensus on the most important factors.
Significant contributing factors
Focus on the user and all else will follow.Rule #1Google’s ‘Ten Things’ Philosophy
User experience (UX) refers to all actions taken in a product/project with the end users’ well-being in mind. UX is one of the most (if not the most) important factors that affects ROI. When developing software in IT projects, the customer experience is key to the project’s success, so it is top priority to take UX into consideration, as it can affect ROI at any stage of a product’s life.
When the UX experience is low, this can significantly reduce ROI, whereas good UX directly translates into higher ROI.
It is important to make use of historical data that has already been collected when it comes to ROI in UX. Typically, this is measured in three different stages:
- Before the project begins: Conducting appropriate research in the discovery phase is critical for its success, as it allows you to clearly define the scope of work and reduce issues down the line.
- During the project: Fixing an issue in the design phase is roughly 5 times cheaper than during development.
- After the product has been released: Adoption rates are increased by 20-70% when the product is designed with the user in mind.
Measuring the success of UX in ROI is key, and there are several methods of going about it:
This is used when measuring how often users perform a desired action.
Mostly used in e-commerce, focuses on how often users ‘bounce’ and don’t end up purchasing the contents of their shopping cart in an online shop.
Net Promoter Score (NPS)
As a general indicator of brand/product loyalty, a higher NPS means higher engagement, and subsequently, a higher growth potential.
(…) the highest returns are expected from investment in UX.
Revenue per customer
This indicator measures the cost of each action by the user. E.g. cost of an advertisement up until purchase, divided by the number of clicks.
System usability score
This refers to survey feedback from customers on the usability of a product.
UX is undoubtedly extremely important, as increasing income while reducing maintenance and support costs is one of the biggest factors in delivering the highest returns on investment.
Process automation is another significant contributor to ROI, typically by companies who measure ROI ‘immediately after investment’.
This is the quickest way to save money. In a very short time, you can automise a lot of error-prone manual process steps.Tom ReichertIT Manager
In order to increase ROI in process automation, the key is to decompose business processes into specific tasks, and then prioritise them as required.
Typical tasks that increase ROI based on process automation could include:
- tasks based on clear rules;
- labour or time-intensive tasks;
- repetitive tasks;
- tasks with defined data structures.
In order to calculate the potential ROI savings due to process automation, we use the following formula:
Automating process helps to minimise downtime, which helps in driving costs down and increases savings. In order to work out the total savings made from missing downtime, we use the following steps:
- Estimate the loss of not having the service available for a period of time.
- Calculate the cost of the loss:
- Estimate the expected [%] reduction of incidents.
- Calculate the annual savings:
For many IT companies, migrating their business to the Cloud is a direct result of ROI decision-making. Business in North America, for example, consider the cloud to have particular importance when it comes to ROI and feel that it has a direct effect on influencing their bottom line.
Migrating business operations to the Cloud doesn’t have to be an all-or-nothing decision – while the entire business could move over to the Cloud, companies can also be successful by simply migrating certain areas of their operation over. Completing a limited migration can sometimes be an effective move, allowing companies to retain some information in-house and the rest in the Cloud, thus optimising costs and boosting performance.
The discovery stage
Another important contributor to ROI in IT projects, the discovery phase, plays a key role. At this stage, understanding the issue and not simply ‘assuming’ it is important when it comes to enabling the company to gather as much knowledge as possible relating to their project. Developing solution processes that seek answers to previously defined ‘problems’, as well as engaging the stakeholders in this development, is important. It reduces the number of errors that may occur later, saving both time and money.
We can calculate how the discovery phase impacts ROI using the following formula:
Using an effective discovery phase to reduce errors and costs helps to avoid scope creep – a situation where new features and functionalities are added by the project’s stakeholders that were not originally planned for. Scope creep can be a real challenge, as it often increases both the time required to successfully complete a project and its cost.
While it is almost impossible to avoid entirely, it’s essential that companies stay on top of scope creep as much as possible because a higher scope creep results in a lower ROI. By involving the stakeholders early on in the discovery phase, scope creep can be significantly reduced. In addition, involving users at the beginning of the discovery phase can also help to reduce scope creep, as they will identify issues much earlier than would have occurred had they only been exposed to the product towards the end of the design phase.
In Wellingtone’s 2020 ‘The State of Project Management’ report, engagement and risk management were identified as the two areas that were most valuable to a project’s success. Risk analysis helps to allow issues to be identified and addressed right from the outset, so it’s another key area to increasing ROI in the discovery phase.
The IT delivery process
Implementation speed is another key contributor to the overall ROI of an IT project. It goes without saying that the faster a new or modified feature can be implemented, the better the ROI will be. While modern frameworks undoubtedly speed up this process, they also allow developers to focus on more pressing issues relating to delivering business value.
Most often, making changes to a project involves getting rid of some processes, then doing them again. This increases both cost and lead times. The need to change aspects of a project is sometimes due to an ‘ignorance’ of the project ‘as a whole’. Having a strong discovery phase helps to mitigate this risk, as developers and stakeholders alike are able to agree on solutions early on, speeding up the process.
ROI is undoubtedly a key metric in determining the success of a project or product. Depending on the nature of a company, they may feel that one (or more) contributing factors are valuable for their business operations. It’s highly likely that companies need to consider a range of factors when prioritising their ROI-driven activities, as they all have an important role to play in the success of their projects.
For more information on ROI in IT projects and the contributing factors to ROI, download our ROI report below.