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Calculating ROI for Buying New Technology

(January 25, 2002)

By Richard N. Tooker

Any company contemplating the purchase of technology to drive database marketing or customer relationship management initiatives usually faces the need to cost-justify the investment. In this situation, the data that go into the return on investment calculation falls into four general areas.

Cost. This is the total cost of buying/licensing the technology and deploying it. It should include the cost of personnel that will be dedicated to the use of the technology, fully weighted, unless they are already on staff. This will, of course, be the easiest number to get your hands around. In most cases, companies will amortize any initial or extraordinary setup/licensing/installation costs over the life of the vendor contract, but generally not longer than three years.

Process Improvement Savings. Many companies spend an enormous amount of marketing department time in the give-and-take of deciding what to do. New technologies should make that a much more efficient process. Marketing people should spend less actual time in those pursuits, and fully weighted hourly costs should produce significant dollar savings.

Of course, this has to be balanced against the cost of any additional personnel you might plan to hire to work with the technologies. Still, the savings should be significant.

One other factor to consider in process improvement is the benefit of quality assurance. If you have real examples of programs that did not work because of quality control problems (mailed to wrong people, late execution, etc.) and can put a dollar cost on those problems, it might be reasonable to assume that your new technology will save you money because you will not incur those problems going forward.

Information technology savings. If your marketing people will be doing segmentation and extracts using the technology, that will free up personnel and machine time in information technology. Often, this benefit alone is enough to cost-justify an investment in new technologies, especially if you (like many companies) have interdepartmental billing.

Over the course of my career, I have seen many instances in which IT has purposely inflated intercompany billing costs to shift budget dollars to other departments. As a result, the intercompany savings in marketing are enough to buy the technology without including any other revenue sources. Assuming those in your IT department have not done that, though, you can still ask them for an accounting of the machine and people time they are expending on your behalf that will be obviated by the deployment of your new technology. If you properly weight that time to include benefits and share of general/administrative expenses, it is usually a very significant number.

Time to market. Aside from the obvious benefit of addressing competitive pressures, getting to the marketplace more quickly with new initiatives produces real revenue. Let's say you have a new product to launch that you expect to generate an average monthly revenue stream of $100,000. If you can get it to market 45 days faster, then there would be a $150,000 revenue bump at launch that you would not have gotten any other way.

And if faster time to market allows you to implement more programs over the course of a year than you would be able to otherwise, you might be able to logically include all the revenue from one or more additional programs in your calculation. If you want to make that a believable benefit, though, you need to show historical examples of programs you had to abandon or delay significantly because you did not have the technology to get them done on a timely basis.

In addition to the hard numbers in the four factors above, there is the additional benefit of basic empowerment. Having this technology will allow you to do some things you would not be able to do otherwise, at any cost. Quite often, companies justify their entire investment based on there being no other way to do the things they have to do to take their business to the next level. There is a hard-dollar benefit to this, of course, but it is somewhat harder to quantify.

You have to put a dollar figure on what it is worth to you to be able to implement better targeted communications and/or customer dialogues, more frequently and efficiently; but of course you cannot test to arrive at that figure until and unless you make the investment.

The empowerment factor is hard to quantify. The best bet might be to say you think it is reasonable to assume it will allow you to generate incremental revenue in the "X" percent range, if you need dollars from this benefit to make your ROI calculation work. But if you do that, keep the percentage small -- less than 1 percent. Otherwise, your chief financial officer might consider it padding.

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