Investing in and implementing information technology (IT) can enhance efficiency and increase profitability.

However, many companies struggle to quantify the actual return on investment (ROI) of such technology.

Since ROI analysis is essential to the successful implementation of any technology project, let’s first examine the key metrics of IT ROI, and then look at how to assess the risks and costs associated with investing in IT projects.

IT decision-makers must focus on a project’s financial ROI, which incorporates three key metrics:

1. Payback period – the amount of time required for the benefits to pay back the cost of the project;
2. Net present value (NPV) – the value of future benefits in terms of dollars today; and
3. Internal rate of return (IRR) – the benefits of the IT project as an interest rate.

For example, let’s say a medium-sized contractor has begun research on implementing mobile technology for its field technicians. Based on such factors as software, hardware, and man-hour costs for both IT staff and technician training, the project will cost $40,000 and the cost of money for the project is 10%.

Over a five-year period, implementing a mobile solution will save the business $15,000 per year through fewer trips back to the office, which uses less fuel in the process, as well as more efficient billing cycles, which reduces misplaced or damaged paperwork and minimizes errors associated with manual data entry. (See Exhibit 1.)

Based on this information, the payback period is about 2.67 years, with an NPV of $16,862 and an IRR of about 30%. (See Exhibit 2.) If the construction industry’s standard IRR for implementing mobile solutions in a similar company is, for example, 15%, then the project in this scenario provides a fairly successful IRR and is likely worth pursuing.

Risks & Uncertainties

As with any business decision, risks and costs must be considered before making a significant IT investment.

In general, the larger the scope and the longer the IT project takes to implement, the more susceptible the project is to risk and uncertainty. According to Gartner, small IT projects tend to fail roughly 20% of the time, while mid- and large-size IT projects fail 25-28% of the time.¹

Here are some of the potential risks that could arise during a project’s implementation.

Business Risk

When it comes to business risk, one primary question must be asked: What is the impact to the business if it proceeds with the project vs. deciding against it?

Let’s reconsider the case of implementing a mobile service solution for field technicians. Although there is a potential ROI of 30%, several risks could affect the IRR. For example, if some of the employees are averse to change and adopt the new technology at a slower pace (or do not adopt at all), then the IRR can quickly dissipate. Factors outside of a business’ control, such as hardware or software issues that result in downtime and reduced productivity, can also increase business risk.

There are also risks with deciding against its implementation. The company could lose its competitive advantage as other contractors increase their market share and profitability by adopting this type of solution. It could also reduce customer satisfaction if the company’s current technology begins to fall behind the industry standard.

Since business risks can occur in either scenario, the key is to assess all possibilities to help prevent failure.