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When an economic downturn starts to hurt, small businesses often hunker down and cut costs. But new technology solutions may be necessary for survival and growth—and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, we’ll review what ROI is, explain how an ROI analysis can help you save or make money, and provide guidelines for analyzing the ROI of a technology investment. Part 2: How ROI can Justify a Technology Purchase In Part 1 of this series, we examined the basics of ROI—and also noted that ROI is in the eye of the beholder because it has many intangibles. This month, we’ll go into more detail about the different ways a small business can realize a ROI on technology investments—even in an economic downturn, when the conventional wisdom is to cut expenditures. There are three ways that a technology investment can pay off: Reduced downtime. Some downtime is clearly associated with lost revenues: When your website is down, for example, revenue will be lost as a result of customers not being able to place orders. But when internal computers and networks fail, employees are idle—and this, too, could ultimately cost you money. Businesses that have upgraded and efficient IT systems, and those that have managed services vs. a break/fix model (also known as service on demand), simply have busier employees—and busier employees bring in more revenue. Increased productivity. Technology allows employees to do more work in less time. For example, a new database management application might improve timely access to accurate information (which would result in less time spent searching for data) or reduce errors (which would result in less time spent revising work or handling customer complaints). Or, a network with remote connectivity might result in less lost time when employees are traveling, Lower costs. Technology allows small businesses to spend less. For example, a new inventory management application might reduce inventory costs. A new teleconferencing system might reduce travel costs. And a new process management system might reduce headcount, which can lead to lower labor costs. Just how much could you benefit financially from a technology solution? As just one example, Microsoft surveyed 25 small businesses that used Microsoft Windows Small Business Server 2003, a network operating system that provides small businesses with secure Internet connectivity, an intranet, file and printer sharing, backup and restoration capabilities, a collaboration platform, and more.The average cost of the package was $11,650—which included $3,341 in hardware, $2,003 in software, $4,561 in installation, and $1,477 in downtime, plus incremental support. The 25 users surveyed saw a payback of total costs in just 4.9 months. The total average annual benefits were $40,409 and total three-year benefits were $121,227. The software resulted in an average ROI of 947 percent, with some companies realizing a ROI of as much as 2,000 percent. Getting at those numbers, however, may be the greatest challenge of ROI analysis. Because ROI is not one simple thing, there isn’t one simple way to measure the costs, returns, and benefits of a technology solution. In Part 3 of this series, we’ll look at the many different questions one must ask during a ROI analysis.

When an economic downturn starts to hurt, small businesses often hunker down and cut costs. But new technology solutions may be necessary for survival and growth—and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, we’ll review what ROI is, explain how an ROI analysis can help you save or make money, and provide guidelines for analyzing the ROI of a technology investment. Part 1: Understanding ROI There are two ways to look at the value of technology: total cost of ownership (TCO), which quantifies only the cost of a project, and ROI, which quantifies both the cost and expected benefit of the project over a specific timeframe. Traditionally, businesses have used TCO when analyzing the cost of internal infrastructure projects such as upgrading an e-mail system. But even with internal systems, ROI can be a better method: If your old e-mail system goes down, for example, your sales team can’t contact customers electronically and must spend more time making phone calls. If your employees spend two more hours on calls than they would on e-mails, you’ve actually lost money by not upgrading your e-mail system. When it comes to any non-internal technology, however, ROI has long been the gold standard. That’s because technology can drive profit growth by increasing revenue. Looking at ROI is particularly important when an economic downturn limits your budget. Indeed, an economic downturn may be the best time to assess your technology spending—because by investing wisely during a downturn, you can strengthen your future. As an example of how ROI works, consider the case of a small, high-end electronics boutique. The current point-of-sale (POS) software program is beginning to show strains from the company’s expansion and increasing inventory, and customer service issues are arising—a problem since the company’s mission is to provide exceptional customer service. The company’s owner believes implementing a new POS software program will help address these issues, but deploying it will be costly. The key question is which will cost more in the long-term: spending the money to provide a solution—or the losses the boutique will incur by not doing so? That question may be easier to ask than to answer. As important as determining ROI is, there is still little consensus about how to measure it accurately. ROI, it seems, is in the eye of the beholder. That’s because ROI has many intangibles—things that don’t show up in traditional cost-accounting methods but still maximize the economic potential of the organization, such as brand value, customer satisfaction, and patents. For example, a knowledge management system may not reduce your costs in obvious ways, so how can you justify it in a tight economy? You probably can’t if you measure ROI by asking what a project will do for your bottom line in a year. But if the new system leads different parts of your company to collaborate, which in turn produces better goods and services that lead to top-line growth, then your ROI is strong. In Part 2 of this three-part series, we’ll go into more detail about how a technology investment can provide a high ROI.Later, in Part 3, we’ll offer some guidance for conducting your own ROI analysis.

When an economic downturn starts to hurt, small businesses often hunker down and cut costs. But new technology solutions may be necessary for survival and growth—and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, we’ll review what ROI is, explain how an ROI analysis can help you save or make money, and provide guidelines for analyzing the ROI of a technology investment. Part 3: Analyzing ROI As we explained in Part 1 and Part 2 of this series, today, more than ever, small businesses considering a technology investment should analyze not only the costs of that investment, but the expected ROI as well. Unfortunately, few models exist to guide you through that analysis, and with good reason: Determining ROI involves looking at many components, then applying those components to your particular situation. Doing this requires making many choices, so first, let’s look at the things one must consider—from both a cost and benefit perspective—when considering the ROI of a technology investment. Your existing technology infrastructure. There are few companies without existing technologies in place—and any new solution will need to work with these systems to be effective. There will likely be costs associated with the new technology’s impact on existing systems—but there will also be benefits. For example, a new technology might offer more efficient automation of workflow or improved information collection, storage, and access. Your b usiness processes. A new technology can clearly improve your businesses processes as described in Part 2 of this series—by reducing downtime, improving productivity, and lowering costs. But implementing the new technology will likely involve training staff in using the technology—and that can have associated costs. Your external relationships. Finally, no business is an island: Your systems may link to customer and vendor systems. As a result, any new technology may impose constraints or require changes of external organizations or individuals—in the way information is delivered or received, for example. To solve this puzzle, it can be helpful to ask three different but related questions about the technology solution’s cost , effectiveness, and efficiency . Cost: Can you afford the technology—and will it pay for itself? To answer these questions, you’ll need to know the cost of the solution itself and the monetary value of the resources used to implement it, measured in standard financial terms. You’ll then compare the dollar cost of all expenditures to the expected return (in terms of the projected savings and revenue increases). You may need to project the cost and return over a multi-month or multi-year time span in order to show a payback period. Effectiveness: How much bang for your buck will you realize? Now the analysis becomes more complex. Analyzing the effectiveness of a technology solution requires you to look at its costs in relation to how effective it is at producing the desired results—in essence, to expand your measurement of ROI beyond cost savings and revenue increases to include performance relative to your company’s goals. To do this, you’ll probably want to look at unit cost or activity cost. Efficiency: Is this the most you can get for this much investment? Finally, you’ll want to ask whether the technology will produce the greatest possible value relative to its costs. That can present difficulties, as it will require you to conduct a similar analysis on many alternatives, perhaps simulating the performance of the alternatives in some way. These three types of measurements differ in several ways. While the first is based simply on Financial metrics—i.e., cost in pure dollar terms—the other two include production output metrics, including the quality of goods or services and customer satisfaction. These production output metrics may even extend to employee morale, or in the case of some companies (such as manufacturers of “green” products or non-profits), social or political benefits. All of these measurements, however, help you answer the same basic question: whether an economic downturn is a time to reduce technology spending, or a time to examine priorities and decide which technology investments will pay off in the long-term.