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Return on Investment (ROI) is a common metric used in finance today for evaluating, approving, and measuring the success of investments or projects. Typical situations for using the metric could include: purchasing a new piece of equipment, opening a new facility, or developing a new product. To use this metric effectively it is important to understand the overall formula, the definition of each of the terms in the equation, and the steps to take for using it in the decision making processes.<\/p>\n
In general, the formula would look something like this:<\/p>\n
Simple ROI = (Gain from Investment \u2013 Cost of Investment) \/ (Cost of Investment)<\/em><\/p>\n Although, each company may have a different flavor of the ROI metric, meaning differences in the formula could include:<\/p>\n To help understand these differences and get a better idea of how to use ROI let\u2019s look at how ROI applies to Quality Management Software.<\/p>\n The ROI calculation is a good tool for evaluating investment decisions and it is only natural to try and apply this tool to purchasing software. In fact, using ROI to purchase software is nothing new at all. Companies have been using ROI to validate purchasing decisions of ERP Software, Engineering Software, CRM Software, and more for many years.<\/p>\n Interestingly, using ROI as a tool to predict and then review actual results has also been a topic of extensive research in the market place. Although there have been some differences in these findings, the major takeaway has been that those firms calculating ROI both before and after software implementations end up with more successful implementations.<\/p>\n There are different theories on why simply measuring ROI improves ROI but it probably goes back to the old adage \u201cif you don\u2019t measure it you don\u2019t manage it\u201d.<\/p>\n One area where ROI for software investments has not been used effectively has been the Quality Management Software space. Often when companies invest in a Quality Management Software it is because they feel they are out of compliance, producing low quality products, overwhelmed with the inefficiencies of paper based documentation, are trying to manage many disparate systems, or face any number of other quality related issues. In these situations, companies simply purchase the software to alleviate the pain and don\u2019t necessarily look to see what real Returns on the Investment can be made.<\/p>\n This approach is not necessarily \u201cwrong\u201d but in general the implementation will go smoother and the benefits will be further reaching if ROI is considered in the process. Which lends the question, how should ROI be calculated for Quality Management Software?<\/p>\n This question is really two questions in one: what will my real costs be and what are the total savings I can expect? To better answer these questions we have created a step by step guide to help guide you through the process.<\/p>\n To best illustrate the steps that can be taken in determining the ROI, we\u2019ll use an example to help walk us through the process. We\u2019ll use \u201cCompany Y\u201d as our target. Company Y is a midsized manufacturer with $100MM in revenue and has been struggling with quality and compliance issues for several years now. It has been an issue of increasing importance and is now on the CEO\u2019s radar. Last year, before looking at directly investing in software, Company Y first wanted to better understand their business and quality processes.<\/p>\n Step 1 \u2013 Benchmark Performance:<\/strong>\u00a0Company Y decided to go through a benchmarking process, documenting their internal business processes, performance in metrics like Cost of Quality, and use of technology. Through this benchmarking process they discovered:<\/p>\n\n
Using ROI for Software Buying Decisions<\/h2>\n
Calculating ROI for Quality Management Software<\/h2>\n
The Steps to take for Measuring ROI on Quality Management Software<\/h2>\n