Answering That All Important Question - What’s the ROI?

By Ross Smith, John Turner

Geospatial technology has been leveraged in the utility and telecom sectors to manage critical network infrastructure for many years. It has taken on an increasingly central role in the operational, regulatory and safety aspects of operating a customer-focused and efficient utility. Smart grid further enhances this role.

Despite this, geospatial technology advocates face on-going challenges with justifying, proving and communicating the value of investing in geospatial solutions. Even those with mature implementations are facing challenges with increased pressure to cut budgets or delay spending.  Spending cuts and delays inevitably impact the ability of the organization to take advantage of and leverage geospatial technology. However, the negative impact to customer service, safety and operational effectiveness, and ultimately business value, is often difficult to articulate, quantify and prove.

Many senior leaders, regardless of industry, will listen to arguments about why the investment in geospatial technology is important, but inevitably they will ask the question: "What's the ROI?"

Surprisingly, we have found that there is a great deal of misconception and misunderstanding about what the term "ROI" (return on investment) really means. This article explores the various flavors of ROI, what it really means to a senior executive, and the various approaches to calculating ROI that you might consider.

What is the ROI Analysis?
The term ROI is often used as a catch-all term for an analysis that answers the following questions:

  • What strategic value does this initiative/investment have for our business? (e.g. competitive advantage)
  • What financial value does this initiative/investment have for our business? (e.g. improving cash flows, shareholder value, rate recovery)
  • What financial return will the investment deliver? (e.g. net present value (NPV), internal rate of return (IRR), discounted payback period)
  • Is this investment going to deliver value for money? (e.g. whether we can quantitatively prove it or not, does it feel like a good use of our money?)

Typically, senior leaders are looking to understand all of these issues to some degree or another, but in our experience if you have not proven that it is good value for money at an emotive or gut level, the rest of the figures will have little impact on your senior executives.

It is critical to understand what your senior executives are really asking for so that you can show how the initiative/investment helps solve their business problems and meets their business objectives. You are then in a position to prove, justify or describe to them the value of the geospatial solution in terms that they recognize and buy into. Again, it's more about value for money than it is about traditional NPV. You also need to consider what the focus of the ROI-based analysis should be. For example, is it:

  1. to communicate the value so people "get it" (elicit an intuitive or emotional reaction)?
  2. to prove the value quantitatively so it is irrefutable (based in fact)?
  3. to help drive toward the actual realization of value (measuring success, not just "doing projects")?
  4. to secure the right amount of funding to achieve the desired results?
  5. to help drive decision making about investment decisions, priority etc.?
  6. all of the above?

The depth to which you perform ROI analysis will depend upon the primary reason you are conducting the analysis in the first place.

Making the Desired Benefits Your Priority is Critical

Many organizations approach ROI by putting the investment first. They contemplate what a particular investment will deliver in terms of benefit instead of first determining what benefit they need to achieve for the business and then following a structured process for determining the right level and pace of investment to achieve that benefit.

Range of Options for ROI Analysis There are a range of approaches to calculating and expressing the "tangible value" that the proposed investment will deliver. The most common approaches applied are (in order of increasing complexity and sophistication):

  • Discounted cash flow analysis. This is commonly used to value a project by using the concept of Time Value Money (TVM). This approach uses estimated future cash flows (both incoming and outgoing) and a discount rate (the cost of capital) to determine the present value of the cash flows. The sum of these cash flows represents the NPV.
  • +/- Discounted cash flow analysis. This approach is the same as above, although you can apply a range to your NPV calculation by using ranges for cash inflows and outflows. This approach is often applied when you wish to illustrate to your senior executives a best-case scenario for NPV and a worst-case scenario when taking risk and other issues into account.
  • Scenario Based Modeling. This approach leverages NPV again, but it provides a means to change the cash flows (incoming and outgoing) based on specific scenarios. This allows senior leaders to understand how best to balance the level of investment and corresponding anticipated return (benefit) with risk considerations (or, the change impact to their organization). For instance, one scenario might be to implement a geospatial network infrastructure solution only. This scenario has a specific cost, expected benefits and an expected impact to the business from a change perspective. Another scenario might be to implement the same solution, plus a mobile solution as well. The mobile solution would attract an incremental cost to the program, but also - one would expect - deliver more benefit. Another scenario might be to integrate to the ERP platform and deploy the mobile solution as part of the program. Again, this would have a different cost than the first scenario, but also a higher likely benefits return. At some point, the level of complexity and risk will outweigh the anticipated benefits. It is this point that this analysis seeks to determine - the optimum level of investment while balancing risk and reward.
  • Shareholder Value / Profit and Loss Statement - This is a much more sophisticated approach to determining how the proposed investment will impact the organization's income statement and balance sheet. The idea here is to illustrate how shareholder value is impacted by the proposed investment, not just specific parts of the business (e.g. 20% operational cost reduction in a particular department).

In all the cases above (and other potential approaches, and there are many) we recommend that you team with your finance department. It is critical that you have their support and buy-in to the calculations that will be done, and often they are the ones who have access to the operational and capital budgets and finance information (e.g. discount rate, depreciation methods/rules) which are required to perform the analysis.

In this article we have explored various perspectives on the term ROI - what it means, what it is used to achieve, and how to calculate it. It is most critical to determine what your senior executives really want from you if they ask the typical "What's the ROI?" question. By understanding what they need to know in order to help them make an informed decision, you can focus on targeted actions that determine the answers.

Published Monday, November 8th, 2010

Written by Ross Smith, John Turner

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