The ROI Bottom Line
- Invest $2.0MM for a payback of $3.0MM in the first year and a continuing return of $3.0MM per year for the next 5-10 years for annual investments of $50,000.
In 1989 I did a CAD – Curriculum Architecture Design project for the people working with a new CAD – Computer Aided Design system. It was my 36th CAD effort.
It wasn’t my first CAD on CAD – as I had done a CAD for Westinghouse Defense Electronics on their CAD system – my 5th CAD project, back in 1984.
Note: I wrote about this in a newsletter a long time ago – see page 7 of this newsletter PDF – here – and it was also published in ASTD’s Technical & Skills Training journal/magazine back in the May/June 1991 issue (see below) – and then I addressed it in 2 Blog Posts: here (April 2007) and here (May 2011).
Here is the ASTD article as submitted. They changed the title.
Cost of Nonconformance and ROI for Training Projects _ASTD – 1991 – 9 page PDF of the original (not the published version) article submitted and published in ASTD’s Technical & Skills Journal in their May-June 1991 issue under the title: Costing Out a Training Project (which it did not address). This presents an alternative approach for determining ROI that was unique to one of my client’s situation, and proxy for ROI: RONA – using the quality concepts of Cost of Non-Conformance and the Costs of Conformance in place of returns and Investments respectively.
The tile the editors gave my article, had little to do with Costing out a Training Project, but had everything to do with Determining the potential ROI.
The client had 100 people struggling with the new CAD system, and the vendor training wasn’t proving adequate, leading to many costly mistakes. Poor designs caused bad tooling – and bad prototypes – or other issues that didn’t show up for a long time. Costs so huge – that no one really wanted to look at too closely.
When I was rebuffed in a PST – Project Steering Team – meeting about how to determine the value of implementing the CAD just under 2 million dollars (in 1989) to develop it all and deploy it all, as no one wanted to discuss scrap through the entire product life cycle, I tacked around to the another cost of non-conformance (CONC).
One more easily calculated, and although “only part” of the ROI Risk to be Avoided and/or the ROI Reward to be Achieved, it would be “significant enough” to make or drive the business decision.
I’m talking about “what are you really getting for your salary costs?”
You pay 100% for what kind of return (for whatever reason) for THOSE Investment costs?
That’s the R in ROI – or one of many R components anyway. R, like I, is typically much more complicated than a single number source for each of the 2 key letters – R & I.
Do the ROI Math in this Word Problem
- ROI = R-I/I
There are 100 employees who had shifted from draftsman to CAD-CAM system operators. Each with an annual, fully loaded salary of $60,000.00.
The Estimated Starting Competence Percentage – in the use of the CAD system – 25%.
The Estimated Final Competence Percentage – in the use of the CAD system – 75%
What’s the ROI?
What’s the R? and what’s the I?
What’s the R?
- A- $3MM
- B- $15MM
- C- $30MM
- D- What’s the Payback period?
For one year it would be A, for 5 years B, and for 10 years C.
Can’t forget about the period of time over which Investments expenses might accumulate, and Returns would accumulate as well.
How to Think About ROI for Salary
If you have 100 people making $60k that’s $6MM per year (100 x $60,000.00 = 6,000,000.00). But you are only getting 25% return on that, only $1.5MM – costing you $4.5MM per year. You are leaving $3MM on the table.
That’s the Gap. $3MM. Every year. Pay $6MM and get $1.5 instead of $4.5 – but there were arguments that the end result should be more that 90%. And other arguments that the fully loaded salary was more than calculated. Conservative on both ends then.
Over 5 years that’s $30MM. In the Costs of the Gap.
Over 10 years that’s $60MM. In the Costs of the Gap.
And that’s just for salary costs wasted, and doesn’t even begin to touch all of the other costs that poor CAD designs are costing. Not even. Those are the numbers nobody wanted to uncover. The BIG Gap.
Anyway, the client didn’t want to look at that, so I went for some proxy.
So – What’s the Tolerance for Investments?
Would you spend $2MM to address this in year 1, and less than $50,000 a year after that?
Over 5 years that’s $2.2MM.
Over 10 years that’s $3MM.
The R for the I
By the end of year 5 you would have invested $2.4MM to get a return of $15.0MM.
By the end of year 10 you would have invested $2.9MM to get a return of $30.0MM – if nothing else changed, which would be, you know, unlikely.
So stick with the 5 year numbers, or the 3 year numbers. More believable.
By the way, by the end of year 3 you would have invested $2.2MM to get a return of $9.0MM.
And if you were looking at this for a Payback Period of only 1 year, you would have invested $2.0MM to get a return of $3.0MM.
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