Project Management's Return on Investment
One important component of many formal
business cases is a ‘Return on Investment’ or ROI calculation.
Simply put an ROI
calculation compares the cost of a project with the benefits you expect to
Different projects can then be evaluated on a like-for-like basis and
the best use for the money selected.
Obviously to compare costs to benefits
they need to be stated in the same ‘units’ and not surprisingly these are
This is where the problems start.
The cost of a project is
usually fairly easy to determine but the benefits can be much harder to
quantify. Benefits are usually determined by asking the customer to estimate
what benefits, in dollar terms, they hope to achieve through using the product.
This could range from freeing up someone
from a manual process (saving money) to attracting more customers. These are
fairly easy to put a dollar figure to but are based on future predictions which
can be unreliable.
For example how many hours of someone’s day will you free up?
How many more customers will this product attract?
Sponsors tend to inflate predicted
returns in order to get 'their' project up and running. They will confidently
stick a finger in the air and predict a 50% increase in customer numbers if the
project is delivered correctly. While it is not primarily your problem, you
might be lumbered with unrealistic expectations for your project.
You might also
be lumbered with the blame for 'not implementing the project properly' when it
fails to deliver the expected returns. Fortunately most companies are terrible
at actually comparing expected results with actual results.
Notwithstanding this, if you can
confidently estimate one of these values you can then compare your costs to your
Your return on investment is the ratio between the costs and the
benefits with a positive ratio indicating profit, or a return on your
investment. This is normally done over an extended period of time to determine
when the product will reach its ‘payback’ point.
For example if I decide to make a
terrific new product which would help me breed marmosets, I could work out the
ROI like this:
1. I estimate that it will take me
roughly six weeks to design, develop and debug my product.
I will also need a
new PC costing about $2000 and some important marmoset measuring equipment
costing about $500. I also pay myself about $500 a day, so the cost would
therefore be : 30 working days x $500 + $2500 hardware = $17 500
2. By surveying my prospective market I
determine that there are about 1000 marmoset breeders in my local area.
estimate that I will reach about 10% of them the first year, then as my fame
catches on I will sell to another 30% of them and then as competing products
come on the market sales will decline back to a steady 10% per year.
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