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What Characterizes Real ROI and How Do We Measure It?
Real ROI models succinctly and accurately answer investment decisions, and are: professional; practical; built on rock-solid benchmark data; and have an integrated closed-loop ROI.
Posted Apr 12, 2004
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Real ROI models succinctly and accurately answer investment decisions, and share the following characteristics: 1. They're professional 2. They're practical 3. They're built on rock-solid benchmark data 4. They have an integrated closed-loop ROI Professional Real ROI crisply summarizes the key financials of total cost of ownership (TCO), internal rate of return (IRR), net present value (NPV), and payback period. Always require two values for payback period: chronologically how many months will it realistically be before recouping the total investment; and the traditional payback period calculated by dividing total value by program cost. This latter value while mathematically valid, overlooks the amount of time and cost needed to start up a new program, before substantial value begins to accrue. Practical input Conventional ROI models are dependent on providing accurate answers to dozens of input parameters, yet all too often the required answers are wrong, and the resultant ROI model may be impressive in appearance, but is fundamentally flawed. Advanced ROI models overcome this defect by creating a model that requires only a small number of inputs, all of which can be accurately answered, while simultaneously creating a more accurate estimate of value Practical scenarios Real ROI allows you to run multiple scenarios to answer key questions about the impact of a proposed investment. For example, if you're planning to install an integrated knowledge management and CRM solution, the ROI should be able to answer questions like: 1. If the company is growing, how much more work can be handled without adding staff? 2. How many fewer staff would be needed to handle a specified growth rate? 3. If the company is in a no growth mode, how many staff could be refocused to other revenue generating areas? 4. Which types of staff could be redeployed and when? 5. What's the value to customers by reducing the amount of time they spend on the phone with us? 6. What's the value from any combination of: decreasing the average time to resolution, decreasing the number of escalations, providing effective self-service on any kind of issue or problem, increasing the accuracy of answers provided, and providing proactive service? 7. What amount of top-line growth will the investment drive? 8. What's the ROI if different teams have differing levels of benefits or the solution isn't equally applicable in all areas? 9. How does the model account for variable usage and adoption?
Benchmark Proof Real ROI uses real data -- accurate company specific input, with assumptions based on guidance from extensive experience with the product under consideration -- not just "industry numbers." Closed loop ROI analysis Real ROI must be demonstrably true. Anyone can generate an ROI number; what's needed is confidence in its accuracy. Such confidence comes from routinely setting in place a program that measures the results and compares to the forecast value -- a closed-loop ROI-analysis model and program. How do we measure real ROI? For more on measuring ROI, see <"How should I calculate ROI for our Call Center?" (March 3, 2003, destinationCRM.com)
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