TFP - Calculating ROI for Technology Investments

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Learn how to produce a business case analysis (also known as a cost-benefit analysis or a return on investment analysis) to support a significant technology investment.   Technology Finance Partners’ white paper includes step-by-step instructions for building a business case analysis and for calculating key financial metrics such as ROI, NPV and payback period, and documents best practices in the production and defense of a business case analysis.   

Calculating ROI for Technology Investments

Abstract: In this short white paper, the author discusses the value of producing a business case analysis (also known as a cost-benefit analysis or a return on investment analysis) to support a significant technology investment. The author provides step-by-step instructions for building a business case analysis and for calculating key financial metrics such as ROI, NPV and payback period, and documents best practices in the production and defense of a business case analysis.

Introduction

Businesses routinely encounter opportunities to reap an expected benefit in the future after committing funds today to a technology investment. Determining whether to move forward or to stand put can be a difficult decision. It may be disconcerting to commit funds today, a monetary bird in the hand, with the hope that greater funds will be reaped in the future. How can the firm evaluate the technology investment opportunity in an analytical, dispassionate way, and increase the likelihood of making the right decision?

A critical tool that helps the company answer this question is a business case analysis (BCA). A business case analysis is a financial assessment crafted by a project manager or analyst to help the firm make an informed decision as to whether a proposed investment is in the best financial interest of the company’s shareholders. A business case analysis often takes the form of a cost-benefit analysis (CBA), otherwise known as a return on investment analysis. A cost-benefit analysis is a depiction of current and future inflows and outflows of capital that result from a significant business decision. A cost-benefit analysis is summarized in key financial metrics that can help a company make an informed go/no-go decision or choose the most promising project among several that are competing for funding. Technology Finance Partners’ practice is to use the terms business case analysis, cost-benefit analysis and return on investment analysis interchangeably. This paper takes the same approach.

Business case analyses are routinely employed by companies looking to make informed decisions about the deployment of capital, particularly in resource-constrained environments. Given that a company likely cannot fund all possible projects that it is considering, the business case is a transparent tool to aid in rational decision making on investments of a sufficient magnitude.

This paper is intended to provide instruction into the process of producing a cost-benefit analysis in support of high magnitude financial decisions. We will argue that producing a business case analysis and deriving key financial metrics such as return on investment is a useful effort and reduces the likelihood of unwisely consuming scarce financial and human resources. Technology Finance Partners’ goal is to persuade the reader to invest the time and effort to thoroughly evaluate contemplated projects, and to provide specific instruction into the steps for producing a meaningful business case analysis.


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