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on June 19, 2019 in Business Case Management

How to Calculate Return on Investment—In Context

chart with percentages at the end

Return on Investment (ROI) is among the most common financial measures used to assess the viability of a proposed investment or project and to track outcomes at the project, program and overall portfolio level. Typically, ROI serves as the North Star for determining the economic value of prospective projects, with other measures such as Net Present Value (NPV) and Internal Rate of Return (IRR) viewed in relation to ROI.

One of the most important factors in understanding ROI is defining the period over which a project will drive measurable benefits—the value period—which by definition almost always extends beyond the project execution period. Many governance frameworks and systems perform well in terms of managing cost and schedule during project execution. Some even provide sophisticated capabilities to track along dimensions such as cost of work scheduled versus cost of work performed, for example. These activities are monitored routinely in the PPM execution environment, which is focused heavily on project delivery.

However, tracking of benefits to capture high-fidelity ROI is not as straightforward.  Information such as increases in top line revenue and margin enhancements must be identified in transaction systems of record and mapped with appropriate context into a business case management framework that provides an integrated view of all costs and corresponding benefits—ROI and other financial measures, along with non-financial measures—both tangible and intangible. In addition, there are important financial metrics that are not necessarily captured as credit or debit entries in a general ledger. The most basic of these is cost take-out. Capture of cost take-out and similar data must occur directly in a system of record focused on comprehensive benefits tracking. With a harmonized approach to calculating ROI across an enterprise or at the operating unit level, programs and entire portfolios incorporating projects under consideration and projects in flight can be evaluated through an ROI lens mapped to strategic goals and objectives.  

With this globalized approach to defining ROI, greater clarity is provided as to classifying contrasting initiatives that are not ROI-driven. Projects driven by compliance or regulatory requirements are typical of initiatives that are not ROI-driven, as might be a project or program designed to neutralize a competitive market threat.

Businesses using best practices to define and track ROI are embracing platforms that not only standardize and institutionalize the ROI calculation, but provide a purpose-built environment for ensuring effective data collection and automate the process of reviewing and approving comprehensive proposed initiative costs and returns that can move smoothly from the business case to the tracking phase. These platforms integrate ROI and other KPIs into an actionable analytics framework.  This allows ROI-driven continuous planning based on real time data, minimizing the effect of self-reported or “massaged” data delivered retrospectively. Business case management solutions offer one convenient location to replace multiple disconnected systems and manual processes for sharing data. Information is readily available and transparent, making it much easier to calculate ROI in context with other measures at all levels through to an enterprise wide portfolio.

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