Support Your Purchase Requests with a Quick and Dirty ROI Calculation
11 Sep, 2013
By: Robert Green
Don't just ask for that new hardware or software your department needs — justify it!
One thing I've learned as a CAD manager is that if I am going to buy anything, I must make a strong economic argument for it. If I don't, my senior management team will never approve funding. Whether it is software, workstations, training, or just a better chair, you must make a reasoned business case — you can't simply say "I want a new computer" and expect it to show up.
The gold standard for economically justifying a purchase is a return on investment (ROI) analysis, but those can quickly become time-consuming and complex as multiyear scenarios, tax implications, and liabilities are considered. Instead I've started calculating a "quick and dirty" ROI to convert lost time into money to make my point. Let's see this concept firsthand by going through an example.
Several times each day, a research engineer has to run analytical processes that are very compute-intensive. She has a three-year-old dual-core machine with 8 GB of RAM that locks up or crashes several times per day and, when it is operational, runs slowly. The engineer estimates 30 minutes per day is lost to computer lockups. She is paid $85,000 per year, but nobody in IT or management will buy a faster workstation to solve the problem because the workstation "costs too much."
New Intel Xeon–based workstation (without monitor): $4,000
Engineer cost: $85,000/year at 200 working days per year at 8 hours per day = $53/hour
Time lost: 30 minutes per day at 200 working days per year = 100 hours/year
Money lost annually: 100 hours per year at $53/hour = $5,300/year
Money lost over three years: $5,300/year x 3 years = $15,900
Return on Investment
In this case, ROI is simply the money you could save divided by the cost of the workstation. By assuming a three-year life span for a workstation, we obtain the following:
ROI = Savings/Cost = $15,900/$4,000 = 397%
Put it this way: If you could deposit $4,000 in the bank and in three years the bank would pay you back $15,900, would that be a good investment? Bankers and stockbrokers would kill for a 397% return over three years! And believe me when I say your senior management team will sit up and take notice if you present this ROI to them.
Finally, I will go to management and tell them it appears we're paying an engineer $15,900 over three years to reboot her computer because somebody thinks a $4,000 workstation is too expensive. Watch the expression on your senior managers' faces as they grasp the business case you're making — then watch your new workstation show up in short order.
The moral of the story: Don't just ask for things. Use this quick and dirty ROI method to justify your requests, then watch your budgets get approved!
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