ROI, TCO and PPI

Return on Investment (ROI) is often the line manager’s measuring stick when determining which technology investment to make.  Take the savings and revenue generation across a relevant time period and divide it by the investment required.  Then determine when the investment will pay for itself.

I’ve seen some multi-million dollar technology investments pay for themselves in just six to nine months. That’s entirely possible when the technology replaces a labor intensive process.

When figuring the costs, however, don’t just stop at what the salesman says the solution will cost. Take into account the entire set of costs over the useful lifetime of the product.  Don’t forget maintenance costs, support costs, training costs, etc.  This is known as the total cost of ownership or TCO.  Solutions that last longer will often compare more favorably to short term fixes that will require a replacement solution sooner.  Of course, estimating useful life has with some complications, so be sure to get several estimates from experts who know the space.

Finally, if you must make a determination among several unrelated projects, consider using the Six Sigma Lean approach known as the Pareto Priority Index (PPI).  The PPI takes the probability of success into account and time of completion.  It’s formula is (Savings x Probability of Success) / (Cost x Time of completion).  A higher PPI indicates a higher priority.

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One response to “ROI, TCO and PPI

  1. How do you determine the Probability of success. That seems a fairly subjective value?

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