# How to Calculate Return on Investment (ROI)

30 June 2011
Best practice

## How to Calculate Return on Investment (ROI)

30 June 2011

This article has been contributed by Kylie Fowler. Regular columnist and Analyst at The ITAM Review.

Most ITAM Practitioners will come across the concept of Return on Investment (ROI) when researching how to build a business case for ITAM.

There is a lot of literature available which indicates that the ROI of a SAM programme can be very high and Practitioners are generally advised to calculate the potential ‘Return on Investment’(ROI) of implementing or improving Software Asset Management as part of the business case.

But what do these figures actually mean? How would you calculate the potential ROI of your own ITAM programme?

## What is Return on Investment?

The Return on Investment (ROI) is a calculation that is commonly used by organisations to help them to decide whether they should make a particular investment or not. An investment is:

“the act of putting money, effort, time, etc. into something to make a profit or get an advantage, or the money, effort, time, etc. used to do this”

(Cambridge Online Dictionaries)

Although more usually expressed as a percentage, ROI is also sometimes used as a synonym for the Payback Period – that is, the time it would take for the investment to pay for itself (expressed in years and months), however both ROI and Payback Period use the same basic ingredients to produce a figure which can help organisations make decisions as to which investments it is worthwhile to make.

The basic formula for calculating the ROI of an investment is to subtract the cost of the investment from the revenues that investment will generate, and divide it by the cost of the investment to obtain a percentage.

So far, so simple – but anyone who has invested money, time or effort knows that the benefits may not appear for some time, even though the expenditure may be required today. In addition, the costs of the investment may not be a one off payment, but may need to be committed over a period of time.

If there was no such thing as inflation, this wouldn’t be a problem. However, inflation means that any given quantity of money will buy less in a year’s time than it does today. This affects the calculation in two ways – firstly, the costs we incur today will have a greater impact on the business than the same face-value cost incurred in several years time, while the same revenue received today will be worth more than the same face-value of revenues received in later years. This means that the face-value of both costs and revenues must be translated into their current day equivalents. This is called ‘discounting’ the cash flows to identify the Present Value (PV) of both the costs and the revenues to allow them to be entered into the formula above.

Further information about calculating the Present Value of future cash flows can be found here.

## ROI in ITAM

Calculating the true costs and benefits of an ITAM programme can be complex, and ITAM practitioners face challenges working out the correct figures for both the ‘revenue’ and ‘cost’ elements of the ROI equation.

### Calculating the ‘Revenues from Investment’

The main benefits from ITAM include reductions in IT costs, improved service quality and reductions in risks. These are not in themselves revenues, and one of the challenges faced by Practitioners trying to calculate the ROI of their SAM programme is converting these benefits into cash sums.

Based on the saying that ‘a penny saved is a penny earned’, the reduction in IT costs achieved by ITAM are added to the revenue side of the equation. Cost reduction is made up of savings, where existing known costs are reduced (eg negotiating a volume discount for hardware), and cost avoidance, where possible future costs are not incurred (eg re-using a harvested software license). Both of these type of cost reductions can be calculated fairly easily and be included in the revenue side of the calculation.

Improved service quality is not so amenable to being reduced to a financial figure. For instance providing accurate ITAM data to Service Desk personnel can significantly improve the speed with which incidents are resolved, as well as reduce the overall number of problems. Not only does ITAM make your IT staff more efficient (they can resolve more queries in a shorter space of time), but it also makes your users more efficient (by reducing downtime). Your Service Desk may be able to provide you with an average cost per Incident, but how do you determine how ITAM has reduced that cost? If the number of calls is falling overall, how can you be sure that this is due to your ITAM programme rather than other factors such as improved staff training?

Calculating the financial benefit of reducing risks is more challenging still. Accountants often include something called ‘goodwill’ on the balance sheet which takes into account things like reputation, but how can you possibly break down that figure to determine how much can be attributed to your ITAM programme? Similarly, a drop in stock market values often occurs as a result of reputational damage, but working out what the drop might be if a laptop full of confidential data was stolen is extremely challenging. And of course, what if you work for a private company and there is no stock price?!

### Calculating the ‘Cost of Investment’

The costs of your ITAM programme are simpler to calculate than the benefits, although it still presents difficulties.

The most obvious cost is the salary of the members of the ITAM team. Although this would seem straightforward, you need to remember that there are always additional costs such as pensions, sick leave, insurance and taxes. Most HR departments have a formula which allows them to calculate the true cost of staff rather than relying on ‘headline’ salaries.

If your team includes people who only do ITAM part time, you need to ensure you calculate the cost of their salary in proportion to the amount of time they spend on ITAM tasks.

This is also the case for the additional administrative burden that ITAM imposes on non-ITAM staff. This is a cost that is often overlooked when calculating the ROI of an ITAM programme, but good ITAM increases the administration involved in many processes including procurement, new starters, leavers, moves and equipment disposal processes. This can add a significant burden to both the Service Desk and Procurement teams, and the cost to them should be calculated by taking an appropriate proportion of their individual salaries eg 5%.

There is then the cost of your discovery, metering, license tools etc. If you use standalone tools this cost is fairly obvious, although you will need to talk to your infrastructure department to ensure you include the cost of ongoing support (eg deploying upgrades).

If you use an integrated Service Management tool which also carries out functions such as patch management, you will need to discuss with the vendor what proportion of the total cost is attributable to the ITAM components. You will also need to ensure you understand the infrastructure support costs and include a proportion of those as well – again, your infrastructure department will be able to assist with the calculations.

As you can see, calculating the ROI for an ITAM programme is more art than a science. The final figure will depend heavily on the assumptions you make when converting the non-financial costs and benefits into figures to enter into the equation. Don’t forget that the costs and benefits of your programme only appear over time, so you will need to discount future cash flows to the Present Value in order to enter them into the ROI equation.