How to Use the “Value on Investment” Formula to Determine a Technology’s ROI

Anyone involved in making business decisions is familiar with Return on Investment, ROI, the common financial measure used to evaluate the return on an investment using the formula:

I understand why we use it. It’s a simple, straightforward, and objective cost-benefit analysis.

But in the technology field, ROI as a decision-making tool is severely limited. By only taking into account “hard costs” and tangible gains, ROI is one-dimensional. In order to make better business decisions, the Value on Investment (VOI) model provides a more well-rounded approach by including ROI along with incorporating intangible costs/benefits.

Let’s take a quick look at a corporation who is considering an investment in videoconferencing technology to reduce the costs of travel. Using the standard ROI model, it’s fairly effortless to calculate. The “gain from investment” would consist of savings from the elimination of travel (plane tickets, mileage, car rentals, hotels, meals) and the “cost of investment” would be the price of the videoconferencing system along with ongoing costs such as system maintenance and bridging services. If the savings are greater than the costs over a predetermined timeframe, ROI analysis would suggest they make the investment.

VOI would agree that a videoconferencing investment should be made, but the timeframe of the value realization is quicker than ROI suggests. Presenting at your local office in a comfortable environment, sleeping in your own bed, and spending more time with your family rather than traveling is a work/life benefit that’s difficult to assign a cost. Additional “soft” value drivers include a green footprint, acceleration of strategic projects, employee demands for flexibility, and increased productivity. While these benefits are difficult to define, it’s important to understand that the entire value of an investment is more complex than dollars and cents.

In the previous example, VOI showed that the technology investment had a quicker value realization than the ROI analysis. However, it’s not always so clear.

Let’s look at an example in higher education, where a university desires to create an online learning program. If the university invests $210k to develop a small professional recording studio and then enrolls seven more students at $30k/year tuition, you have a one year ROI.