What's ROI Got to Do With It? (Continued)

You can describe risk as the probability of an outcome multiplied by the impact of that outcome. If at all possible, risks should be expressed in financial terms. For example, the risk of buying a product might be measured as the product's price and the cost of its installation and implementation. This could be seen as the worst-case scenario, where the tool fails before it delivers any of the expected benefits. That might not be the end of the story, however. Its failure could impact other activities adversely, so it's important to identify any dependent projects or initiatives. It's wise to explore means for mitigating or avoiding such impacts.

You should also explore the risk of not buying the product. This could be the biggest risk of all. Staff might lose motivation and customers might decamp if your current offering is consistently delivered late and is of poor quality. It's even possible the company will be unable to adapt enough to remain competitive. Putting a price on the risk of not buying is hard, because it's not dependent on any one purchase.

The guidelines I've outlined, combined with your individual and company experience, should help you present a strong ROI case to those holding the purse strings within your company. Although the process can be tedious, it shouldn't be overly stressful. The biggest problem with most ROI calculations aren't small mistakes with the details, but forgetting a big item. If you stick with the basics, the ROI challenge should prove not only useful, but enlightening as well.

About the Author
Simon Galbraith is cofounder and marketing director for Red Gate Software, a supplier of tools for software developers and testers. Previously he was responsible for calculating the ROI on proposed investments made by Shell Oil International. He can be reached at simon.galbraith@red-gate.com.