APPROACH: Financial Metrics Defined
Financial Metrics - Defining the Business Impact
Within each case study, we quantify the solution’s impact and increased contribution to the business; and articulate the business value (benefits) in direct financial terms - ROI, net benefit, payback period, NPV, IRR, KPIs, etc. The benefits presented in our ROI Case Studies take into account both direct quantifiable gains, as well as indirect business factors that impact the solution and provide productivity-based gains.
- Return on Investment (ROI), we use either the ‘Annual ROI’ or the ‘Classic ROI’ metric. We use 5 years vs. 3 years as the time period for the calculations because it aligns with when technology becomes effectively obsolete.
The 'Annual ROI' metric is the cumulative value divided by the startup costs divided by the time period (5 years). If the Annual ROI is 201%, it means that every $1 invested in the project returns a net benefit of $2 each year. A five-year ROI of 201% means that the benefits you accrue over five years are ten times greater than all of the costs (the net benefit, in percent, times the five year time period). Annual ROI is good for bottom-line results because it measures the average net benefit per year, relative to the initial investment.
The 'Classic ROI' metric is (Total Benefit - Total Costs in years 1-5) / Startup Costs. This metric puts more weight on the initial investment relative to the costs in subsequent years. Classic ROI is good for assessing the net value benefit of the project relative to the initial investment.
While ROI tells you what percentage return you will get over a specified period of time, it does not tell you anything about the magnitude of the project. A return of 201% may seem initially attractive, but is it a 201% return on $10K or $10M? That is why you will want to know the Net Present Value (NPV).