Calculating ROI benefits and costs (Part Two of Two) – By guest author Steven Levy

Previous posts about ROI calculation noted the time value of money and some of the complex factors affecting benefits. Nailing down the costs is no less complex, according to guest author Steven Levy. A valid ROI calculation includes the following factors on the cost side:

  1. All ROI calculations should include a pessimistic schedule as well as an expected schedule. Note that for the pessimistic schedule, development costs continue unabated monthly through the extended period needed to deliver the solution.

  2. Costs generally should not be adjusted for inflation in future years; the object is to express the full ROI in present-day (constant) dollars. The overall discount rate/time value of money applied to benefits is the right adjustment.

  3. Include the costs to maintain the system in post-delivery years. At a minimum, assume 15% to just keep the trains running. Note that most vendors charge 20% maintenance fees per year – and then some hit you with upgrade fees in addition. Do the same with internal projects. For external software, include the vendor maintenance fees plus your own internal costs of support, data center costs, and so on.

  4. Include legal-department as well as IT costs. It costs the department time (= money) to help with the RFP and vendor selection, or collaborating on requirements with IT for internal projects. It costs the department time (= money) to train the users on the new system.

  5. Note that maintenance/support costs exist for any current system that you’re looking to replace. It’s fair to put these costs as “negative expense” on the benefits side… keeping in mind that the new and the old solution will probably run in parallel for a time, so you won’t get rid of those costs on day 1 of the new solution.

Lexician has a high-end ROI calculation tool that captures the costs and benefits properly. It’s a nontrivial piece of software in itself.

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