Contemplating whether to invest in a product or service requires a decision. Some decisions come easily like deciding on which chocolate bar to indulge in this afternoon. It’s a simple calculation - your return on investment (ROI) will be immediate, albeit the benefits will be short lived.

 

In contrast, more difficult decisions with far wider reaching consequences, greater costs and potential risks require significantly more thought. Unless addressing an urgent crisis, for some people difficult problems often lead to no decision – they end up in the too hard basket. However, for those who want to make a difference, it’s often a matter of calculating the ROI multiple as part of the decision-making process.

 

The ROI multiple is how many times your initial investment will offer in savings or gains. For example, if a home cleaning service costs you $100 and saves three hours of your busy schedule per week, and your three hours is valued at $600 ($200 per hour), then your ROI multiple is six. So, would a ROI multiple of six be enough to encourage you to engage in a home cleaning service?

 

When it comes to business decisions the stakes are higher although often more rewarding. To determine the ROI multiple, consider the factors that surround the problem and calculate the costs and benefits of doing nothing versus the costs and benefits of doing something. This information should assist you with deciding whether to invest or not. What’s important is to amortise the initial costs against the expected life cycle of the financial benefits. Below is an example:

 

Your revenue is not adequately covering costs to achieve a desired profit margin of 45% (it’s only 30%). You already have the resource capacity to generate 30% more in fees, however your fee earners are spending too much time navigating manual and outdated processes rather than spending time on business development, client management and/or fee earning (finding, minding, grinding). The cost to implement a solution that removes the impediments and achieves the desired financial improvements is 5% of your current annual revenue. It will take at least 12 months to implement the solution, which includes managing the change in fee earner behaviour. The 30% improvement in fees is estimated to occur by the third year. Presuming the solution has a life cycle of eight years post implementation, the ROI multiple would be 42. Would a ROI multiple of 42 be enough for you to decide to implement the solution?   

 

If you would like to view the equation to achieve a ROI multiple of 42, see the details below.

 

Better still, if you would like to learn how you can achieve a ROI multiple on your firm’s financial performance the next step would be to contact us.

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Robert Wagner, Managing Partner, Harriss Wagner Consultants & Advisers

 

Current revenue                              $100m

Current costs                                   $70m

Current profit margin                      $30m (30%)

Current revenue capacity               $130m (30% improvement)

Profitability by year three               $60m or 46% ($130m less $70m)

Cost of solution                               $5m (5% of current revenue)

Additional profit (years 3–8)          $210m (7 years times $30m)

ROI multiple                                     42 ($5m generates $210m in additional profit)