Making prudent investment decisions requires an understanding of how each project affects your balance sheet. Gaining a complete understanding of your financial status requires knowing the return on investment (ROI) of your ventures. Investors can utilise this information to make informed investment decisions for future projects, in addition to giving them useful insights into the profitability of present initiatives.
While there are undoubtedly several advantages to incorporating ROI into most, if not all, parts of decision-making, it must be emphasised that every instrument has its drawbacks. An investment with a monetary value is far easier to evaluate than one with intangible benefits – such as improved security, customer satisfaction, and brand awareness. According to our recent report, 91% of survey respondents said that measuring ROI in their companies is either ‘very’ or ‘somewhat’ important, yet only 10% describe themselves as ‘experts’ in ROI and as many as 67% identified themselves as beginners or intermediate.
It was also found that user experience (UX) is the most significant factor affecting ROI and it is easily measured and benchmarked. When it comes to ROI in UX, it is important to be able to refer to data readily available to gain real-time results. This allows organisations to measure indicators before implementing a change in the user interface or customer journey, establish benchmark expectations based on those indicators, and then study how the changes are received.
It is crucial for business leaders to properly plan and execute the process of setting and analysing metrics throughout the entire IT product and services lifecycle. Each stage may affect expected returns, including:
- Before the project begins – The discovery phase of any project is critical for its success and enables businesses to clearly define the scope of work and its success factors.
- Development during a project – It has been said that for every £1 it costs to fix a problem during design, it would cost £5 to fix the same problem during development, and it would cost as much as £100 to fix the same problem after the product’s release. Validating design mock-up solutions is much faster and more cost-effective.
- Support after the release of the project – Developing software with a user-centred design increases adoption by 20-70% and results in a visible reduction of support requests from customers.
Benefits of Measuring ROI
Measuring ROI is essential since it gives you information about how effective your investments have been. It quantifies the effectiveness of each campaign using hard figures and equips you with information that you need to move your projects forward. There are however many more nuanced applications of ROI:
- It can be implemented to provide decision-makers with evidence for funding a project.
- Concluding the accuracy of a project by comparing the predicted ROI at the start of an endeavour to the actual ROI achieved at the end. These are then applied to produce considerably more precise cost and revenue projections for upcoming projects, helping to instil trust in a company and its investors.
- Having a clear definition of ROI makes the planning process easier. This way, companies will find it easier to plan and steer a project effectively.
- Operational usage of ROI is also possible. A Product Owner, for instance, can calculate the return on investment for a project, product, or feature in the future.
- The ability to prioritise tasks, projects, and initiatives becomes more sufficient with calculated ROI. Additionally, tracking ROI can assist in holding people accountable.
Pitfalls When Measuring ROI
ROI metrics frequently mislead businesses because they are measuring the wrong process or result. They frequently place more emphasis on achievements, like website visits, than on results, like gaining new clients. Focusing only on certain aspects of the process rather than on what the process contributes to the overall value of the organisation. Although they may appear impressive, figures must have meaning, and the value of the return in relation to the investment must be understood.
Obtaining Accurate Data
ROI is sometimes treated in a point-by-point manner, only under a business case instead of a continuous process that we observe and learn from. As a result, ROI estimates are viewed as a short-term task at the start of a project and might not be precise or thorough later on.
Cost vs ROI
When calculating ROI in IT, organisations frequently concentrate on the up-front expenditures of a solution’s implementation. The actual cost of facilitating change could end up being far more than the first estimate and might also include less evident expenses.
Risks are frequently excluded from ROI calculations. Risk-related expenses typically only become apparent when they manifest, making it nearly impossible to predict when they will occur.
Challenges of Measurement
The lack of departmental coordination, the absence of specific, measurable goals, the absence of an established and workable ROI plan, or a lack of discipline are just a few of the issues that ROI faces. Other issues include not utilising trustworthy methods to gather the required data or approaching ROI selectively and in isolation.
ROI is often only associated with the financial metric of monetary worth. It is challenging to evaluate an investment when the predicted advantages include both monetary and non-monetary returns. These are immeasurable, non-financial, and difficult to quantify and measure important benefits related to ROI (e.g., increased Net Promoter Score or boosted UX). Unfortunately, it’s frequently completely ignored.
The key conclusion originating from organisations’ experiences is that there is no single way to measure ROI or one scenario that fits all. Investigating various case studies and reports will assist you in developing your ROI strategy and prevent typical pitfalls. It’s critical to remember that determining ROI is always a unique process that necessitates taking into account all relevant and individual aspects related to each project’s objectives.
There are various risks to be aware of, such as a restricted knowledge of ROI in terms of both tasks and field of research. While there is a significant skills gap in the market regarding measuring ROI and establishing benchmarks in terms of returns on software development, effective use of an ROI strategy allows organisations to determine which initiatives are profitable and which areas require improvement.