Any IT investment project is embedded in anorganization’s technology infrastructure (enterprise architecture), relevant business processes, organizational environment, and external relationships.
Technology infrastructure. There are direct costs associated with the technology and services in which you invest, and there will also be costs in terms of its impact on other technology systems already in place. The benefits range from more efficient automation and workflow to improved collection, storage, and access to information.
Business processes. An ROI analysis must not only account for the improvements to relevant business processes, but also for the costs associated with training staff involved in using the proposed technology system.
Organizational environment. Other costs and returns will be linked to the organization, for example through altered resource flows, performance changes, changes in work flows and internal relationships.
External relationships. Linkages with the external environment may be significant as well. Resources may be committed from this environment to support the project and additional costs may be imposed on external persons or organizations by changes in the way services are delivered or other business is conducted.
Choosing and using the various methods of ROI analysis requires sound knowledge and judgment: knowledge about the methods and judgment about how best to apply them. The methods chosen should fit the particular questions asked of an ROI analysis. Different questions require different measurement approaches to fit them. In general, there are four types of questions that prompt or drive an ROI analysis: financial, effectiveness, efficiency, and impact.
Financial: Can we afford this? Will it pay for itself?
An ROI analysis that answers these questions is based on expected savings and revenue increases compared to the dollar cost of all expenditures on the new system. The measures are set by generally accepted or legally mandated accounting standards and practices that apply to the particular government organization. The costs and savings or revenue might be projected over a multi-year time span to show a payback period or to estimate the present value of future returns.
Effectiveness: How much “bang for the buck” will we get out of this project?
The ROI analysis that will answer these types of questions considers how much the investment contributes to achieving program goals and producing the desired results. It considers direct, indirect, and opportunity costs. The indirect costs include such things as training and administration over time. An opportunity cost could be the loss of return or revenue you would have received had you chosen a different alternative. The measurement of returns will be expanded beyond cost savings to include levels of performance relative to program or project goals.