There are only two rational reasons why any commercial enterprise decides to spend money: It is either to save money or to make more money. In some cases the metrics required for justifying an investment decision are relatively straightforward. For instance, the owners of a factory may calculate that by investing in new machinery, they will substantially increase net income from a specific production line. The potential return on investment (ROI) is calculated as the monetary benefits gained from the expenditure over a defined period of time, minus the costs associated with the investment, divided by the costs, expressed as a percentage. If the increase in annual gross profit attributed to the investment is R 5 million, and the total cost associated with the investment is R 1 million, then the ROI is calculated as 400% in the first year of operation. The imperative to invest in the new machinery in this case, is a no-brainer.
Of course, not all spending decisions in business are rational, and therefore justified in terms of money saved or made. In the heady days of the information technology bubble, companies spent huge amounts on the latest software and gadgets, without even attempting to contemplate what attributable benefits would accrue from those wild spending decisions.
Between the two extremes of clear rationality, and total disregard for basic business principles, there is a grey area. Quite often, the link between money spent and the monetary benefits accrued, is indirect, and therefore difficult to quantify. For instance, the unspoken rationale behind spending money on year-end functions, is to contribute towards improving staff morale. Improved staff morale should translate to less staff turnover, which in turn should reduce the costs associated with staff turnover. It would be possible to carry out a study to calculate the ROI of a year-end function, but because of the complexity involved in isolating the numerous factors involved, it is quite possible that the costs associated with carrying out the study, could dwarf the attributable monetary benefits of the function, and thus defeat the object of the exercise.
In organizations that execute numbers of projects of significant value annually, it is generally accepted that implementing an Enterprise Project Management (EPM) solution will be beneficial to some extent. However, it is impossible to rationally justify the expenditure associated with implementing an EPM solution, without at least attempting to estimate the potential ROI. Often a decision for or against an EPM solution implementation is made based on a gut feel as to whether the cost is "acceptable", while considering the benefits only in qualitative terms. Surely, if it can be shown that the monetary benefits of implementing an EPM solution exceeds the cost by a wide margin (large positive ROI), then the magnitude of the cost is only important in terms of the availability of funding for the implementation.
If it is so obvious that calculating the potential ROI of implementing an EPM solution is crucial for making the "right" decision, why then is it so routinely disregarded? One of the answers to this question is that for most organizations that have not implemented even elements of an EPM solution, the metrics required for calculating the ROI of implementing an EPM solution firmly lie in the "grey to black" area referred to earlier. How can you accurately estimate the potential monetary benefits attributable to implementing an EPM solution, if you don`t have any mechanism in place to track all significant metrics associated with projects in your organization? In such cases, the best you can hope to get is a rough estimate of ROI.
Fortunately, the cases where the project execution chaos is most profound are quite often where the potential benefits are the largest. In such cases, a single calculation may produce a positive ROI figure that is beyond dispute, even if the margin of error is large. Consider the following example: A company executes projects with an annual cost of R50M per annum. They don`t have an EPM system, and their overall project management maturity level is low. In the absence of project and portfolio management systems, it would be surprising if the amount of wastage per annum would be less than 10%, or R5M. If the introduction of an EPM system and associated project management discipline would eliminate just 25% of the wastage, that would amount to a R1.25M saving in the first year alone. If the total cost of implementing the EPM system amounts to R0.5M, the ROI in the first year after implementation would be 150%.
Conversely, if the total value of projects executed is R5M per annum, the same calculation would yield a negative ROI, clearly indicating that in this case, implementing a full EPM system does not make business sense, when purely looking at the cost savings aspect.
The previous examples only looked at cost savings directly attributable to reduced wastage in project execution. More indirect business benefits may overshadow the cost savings aspects. For instance, in cases where companies develop products, the additional revenue generated by being able to go to market a few months earlier, as a result of having implemented an EPM system, may overshadow the costs associated with implementing the system, yielding a large positive ROI.
If your company is considering implementing an EPM system, calculated potential ROI figures should be one of the foremost considerations. A few common-sense calculations will give you a good first-order indication of whether implementing a full EPM system makes business sense or not.
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