Magazine Article | September 1, 2001

Putting A Number On ROI

Source: Innovative Retail Technologies

Regardless of the economic climate, it is important to quantify the ROI of your proposed technology investments and to make the most of existing technology.

Integrated Solutions For Retailers, September 2001

President George W. Bush came through with America's extra credit tax break, raising the level of my bank account by $300 this month. My government check was a welcomed surprise, but analysts are still pondering what effect, if any, this national influx of disposable income will have on the faltering economy. It's possible that concrete economic improvement may not be seen for several years. In government matters, uncertain results are acceptable, but retailers don't have the luxury of spending money without establishing an expected outcome.

Technology vendors I spoke with at the Retail Systems Conference in Chicago indicated that retailers are taking a step-by-step, evolutionary approach when implementing new technology. This has forced vendors to adjust their selling focus by enticing cautious customers with not just talk of ROI but proof of it. When it's time to convince your CEO of a proposed technology implementation, there are many ways to measure ROI, but predictions of qualitative results might not be enough. Hard numbers can help you close the deal.

Do The Math
Delphi Group, an e-business consulting firm, made some observations on gaining the highest payback from technology. It said companies that claim their ROI will come from increased productivity need to go further in describing exactly what that means. Instead of simply stating that productivity will increase, quantify how much time will be saved as a result of implementing a particular solution. Time is something that is valuable and can be easily translated into dollars.

For example, when Internet-enabled EDI (electronic data interchange) came onto the scene, it could eliminate various steps in the purchase order process by sending invoice information directly into accounts payable systems. This saved employees the time it took to manually type in the information, which in turn cost companies less money. It was estimated that processing one paper-based purchase order can cost between $50 to $70. Processing the same order with traditional EDI costs about $2.50, but that cost drops another $1 when EDI is transmitted through the Internet.

Build On What You Have
Another important aspect of a new implementation is leveraging existing technology. A survey by LakeWest Group Ltd. found that retailers are known to make their POS (point of sale) hardware last as long as possible — some for seven to 10 years. Those with in-house IT departments are also inclined to patch holes in disparate software solutions in an attempt to integrate them. It is important to look at how certain systems interact with others throughout the entire retail operation, before deciding what can be salvaged and what cannot. If the new POS system is connected to three back end applications, the ROI of the POS will be based on the cost of changes throughout the entire enterprise.

Think Ahead
ROI is determined not only in the pre-implementation stage. Once the system works, the project requires follow-up examinations. This process is easier if ways of measuring payback are built into the system from the beginning. This requires a strong understanding of the purpose of the implementation and built-in mechanisms to record its progress. Say you want to understand why your retail Web site has so many abandoned shopping carts. If you invest in analytical tools to determine customer behavior patterns, there should be a built-in report to collect specific cart information and behavioral data. It might actually cost more to integrate these reports after the fact.

If you were hesitant to invest in retail technology earlier this year, I don't blame you — especially in an economy that fluctuates from day to day. If you look deeper into your enterprise, you might find that ROI comes in many shapes and sizes — just be sure they have a number value.

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