Do you remember your first Apple iPhone? I sure do. How can I forget the day Apple took my hard earned six hundred dollars in one easy swoop! But in retrospect, it felt like money well spent (I know it’s hard to believe, but I’ll explain in a bit). It was ridiculous to think a phone would cost six hundred dollars and even more absurd that people were willing to pay it (like me). I know what you may be thinking and probably Suze Orman would be up in arms about it. But here’s my take on a $600 phone and why it serves as a great example of understanding IT project ROI.
Let’s take a look at the return of investment (ROI) basic principles. In a traditional or what is called the financial ROI model, decision makers select and proceed with an IT project based on the estimated value of the investment. In other words, the cost versus the benefit are compared directly to equate the value. The greater the value, the greater the ROI. Using a simple formula, ROI can look something like this: (Benefit – Cost = Value). Additionally, the core financial ROI are typically broken into 3 common metrics known as Payback period, Net Present Value (NPV) and Internal Rate of Return (IRR).
Payback period is the amount of time required for the benefits to outweigh the cost (paid amount) for the project. Net present value is the value of the future benefits based on the paid cost. And finally, the Internal Rate of Return is the interest rate translation of the project. Simply, the 3 metrics are calculating when (payback), worth (NPV) and rate (IRR) of the project investment.
This leads back to the iPhone example. From a financial ROI perspective, the iPhone cost me a small fortune of $600. The phone would be used for about 2 years with a depreciation at about 50% (as I would be able to resell the phone after 2-year) for about $300. Based on the traditional financial ROI model, this would be a simple calculation with relatively reasonable rate of return across 2 years at $300 cost of ownership. So what is the value (benefit and return) on the phone? The answer depends on how you’re calculating the ROI. As we all know, an iPhone isn’t your typical phone, but rather it’s a ‘smartphone’ or what I call pocketable mobile computer. And this is where the Non-Financial ROI consideration comes in.
With advancement and changes in technology within the IT industry, today, more and more decision makers and technology leaders are using additional variables beyond the traditional financial ROI when deciding on IT projects. These additional benefits or return are known as the ‘intangible’ and ‘unquantifiable’ benefits of information technology or typically known as non-financial benefits. The non-financial benefits are becoming a growing factor with increased consideration weight when deciding on IT projects.
Some of the common non-financial benefits includes increased customer satisfaction, customer service enhancement, usability (that can lead to additional sales), improved accuracy and automation for business processes or workflow, better business intelligence, superior forecasting, employee morale boost (workflow efficiency and usability), improved communications and so on.
As an example, a company decides to invest in an IT system to help improve its inventory and manufacturing process, in a traditional financial ROI model, the ROI can be calculated based on the cost, efficiency, and the savings over time. However, this approach misses the consideration on the potential positive outcome of the system that is usually not measured upfront. For instance, does the increased production translate into greater customer satisfaction? Has the production improved on quality and lowered the complaint volume? Has the system integration helped increase sales numbers? Is there an encouraging public relations outcome with increase production and inventory accuracy? How does this translate into sales or branding (reputation) loyalty? All of these questions are difficult to quantify and calculate simply based on the traditional financial ROI calculations as most are based on post deployment and forecast (after the fact). But let’s take a quick look at how the iPhone can paint the ‘value’ of the non-measurable variables.
The iPhone’s non-financial ROI benefits noticeably outweighed the $300 cost of ownership in my case. Not only has the phone proved to be a great purchase but turned out to be a positive ROI. The revolutionary iPhone has allowed me to communicate with prospects and clients around the clock regardless of my physical presence. Once, I was able to revive a fading account while carpooling home. Stuck in traffic, I was listening to my favorite tunes (from my iPhone doubling as iPod), I managed to access the CRM app, review the sales history, negotiate pricing, and even fulfill a sales order from the palm of my hand all while sitting in the back seat of the vanpool. This event initiated additional sales for our team which in turn increased the company sales and even bonuses.
The intangible value of the iPhone goes beyond just the mobile sales process. It helped me negotiate savings by using online access to cross compare car prices right at the dealership. On another (several) occasion, I had forgotten my wallet and but effortlessly paid with Apple pay saving me embarrassment. Numerous times, the phone has prevented me from asking for directions and simply guided me to my destination. Have I mentioned how many hours I have spent watching entertaining TV shows on it while stuck at the airport? And last but not least, who can put a price tag on priceless pictures of my little one taken a moment’s notice with the phone. These are just some of the basic and short list of functions I’ve used my iPhone for throughout the years. I would say it has been a great ROI beyond the $300 cost of ownership.
I used the iPhone as an example to portray the significance of the non-financial ROI impact. Whether you have an iPhone or any other smartphone for that matter, there is a universal understanding in the value of such device. Hence, people are willing to pay several hundred dollars for them. Similarly, the intangible or non-financial ROI should be keenly considered when looking at an IT project beyond the traditional financial ROI. Non-financial ROI touches on positive impacts ranging from customer satisfaction, customer loyalty, improved work environment, enhanced sales process, better communications and even data analytics. As more businesses start to rely on the importance of customer loyalty, brand exposure, transparency, and ultimately the sales growth, the non-financial ROI becomes even a greater consideration and factor for any business. Next time you’re in a position to review an IT project, just remember to look at your smartphone as a reminder.