Measuring ROI – how to calculate return on investment

The fundamental question underlying any payroll software investment should be: is it worth it? A good investment is basically one which is more of a benefit than cost, but how do measure it?

To understand whether a new HR or payroll software project will deliver a good return on investment (ROI), follow these simple steps:

Calculate costs

What are the costs involved in this project? First, what is the capital cost of the payroll and HR software itself? On top of the ticket price, consider whether you’ll need upgrades over the next three to five years, or additional licenses.

The most widely known formula for calculating the total cost of ownership (TCO) is Gartner Group’s TCO methodology. Put simply, this is a formula for calculating the cost of owning and operating any type of technology.

Gartner’s TCO formula groups all the costs incurred by a technology system under four headings: capital costs, administrative costs, technical support and end-user operations. The headings are an umbrella for virtually every cost involved in using a payroll software application, from buying to installing, maintenance and support.

Put together a team

Once you understand a technology system’s cost, you can begin to calculate the suggested return on this investment – in other words, how does it benefit the business?

Often, it can be helpful to put together a team with representatives from each area of the business impacted by the new payroll software, plus representatives from HR, finance, and IT. Map out what the payroll software will do, noting each process, person and department that will be touched – how will it change?

Number crunch

Crunch the numbers to see how each of these changes will impact bottom line profitability. Look for things such as impact on user productivity, and measurable increases in the number of jobs or items that can be processed in a specific time period.

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Sometimes, benefits come from a reduction in costs. So, will the payroll software allow the company to reduce resources or administration? Alternatively, the benefit may come from payroll software creating more revenue-generating opportunities – will the business be able to enter new markets or increase market share using this technology?

Try to boil down your number-crunching into a single sentence: ‘We will be doing x to make x better, as measured by x, which is worth x’. When discussing any payroll or HR software project, refer to this sentence to reinforce the project – and its value to your company. mktoMunchkin(“589-ITG-580”);