Calculating your ROI is more important than ever

All good business decisions prominently feature your ROI, otherwise known as Return on Investment, into the equation. Whether the decision is to hire a new employee, lease a larger office space, buy 20,000 business cards, or undertake a new sales initiative, every decision has at its core the base question of “is this decision worth my time/money/effort and will it pay off in the end?” This is a relevant question to ask at any time, but it seems that, with the economy the way it is, this question starts becoming more and more important. How will you spend your money and how will you put both your money as well as your time to best use?

With many decisions it is easy to identify your ROI, but also to make a decision based purely on the decision’s bottom line. For example, hiring a new employee. It’s fairly easy to estimate how much an employee will cost over the course of a year, and using income projections, also easy to determine the range of income that new employee will generate for your business. Cost and profit are pretty straight forward. But for some reason, when it comes to technology purchases and web initiatives, something about technology causes people to move outside the purely rational ROI-based decision process and to factor “hip”, “cool”, and “sexy” into the equation. Suddenly the number of megapixels, gigs of RAM, number of processors, search engine optimization ranking, and auto-Tweeting connection to the Blogosphere/Twittersphere/Facebook consumes you with indecision and extra expenses.

The idea of missing out on “the new” and being behind the curve clouds your normal business acumen with a fear of obsolescence, in the same way that you’re afraid to buy hardware that you fear will be obsolete in a few months. You get so caught up in the extra features that you lose track of the purpose of your purchase. In being seduced by how something looks you miss the mark on achieving its original goals.

I bought a computer about six years ago; a middle of the road Sony desktop. It was quiet, pretty fast but not blazing, and had a motherboard that supported an acceptable amount of expansion. This probably wouldn’t be noteworthy except for the fact that, as the owner of a software development firm, I’m what you would consider a “power user”, and that I’m still using that same computer to this day. I’ve added to it over the years, replacing the video card, adding a second monitor, adding some RAM and a new hard drive… but it’s still the same machine and still working great to this day. On the other hand I know plenty of people that buy a new computer every 3 years, each of which cost more than my original purchase, and they use it for little more than email, surfing the web, and light word processing. They read all about their purchase and convince themselves that they need that power and need all those bells and whistles, many of which they’ll never use in the typical three years that they’re using their computer. They tell me that it’ll last them longer, as if spending more now means it won’t be just as obsolete in the near future.

It’s not just hardware that sucks you in to a poor purchasing decision, and it’s hardly limited to the average consumer. Back in the “dotcom” days there were quite a few stories of companies paying six and seven figures for what resulted in a 5 page website with nothing special to make them cost so much. Since then the story has evolved to spending money on micro-sites, blogging, search engine optimization (SEO), social media strategies (Facebook and Twitter are often cited), Second Life, or whatever the hot technology buzzword is for that given day.

In the vast majority of the cases these technologies end up being huge expenditures of money (relative to the company) with very little return on that investment. What’s worse is that even after acknowledging that you’ve spent more money than you ever intended on the technology, you continue to spend money believing that any gains will be lost and that one day it will end up making a return on your investment.

When evaluating any technology purchase it’s important to put the purchase in the context of your goals for your purchase. What will it actually accomplish for your business, how will it fulfill goals you have, and what reasonable return (best and worse case) can you expect for your purchase? And while some of these questions can be asked right away, others require a long-term approach for evaluating the on-going success of the purchase. With these long-term purchases, what metrics do you have in place to measure their success?

This soul searching isn’t just for new purchases, and can be just as important when you need to start cutting budgets. A hacksaw approach to cutting your expenses and budgets is often the quickest and easiest way to lower costs, but if you have metrics (the next article) in place to evaluate certain programs’ ROI, you could take an analytical view of the costs, see their relative ROI, and cut back the programs that aren’t earning you the return that you need.

It’s high time to get smart about your purchasing decisions. Taking an analytical look at the return on investment from each spending choice you make will enable your organization to be that much more effective with each dollar you put to use.