In this blog post we look at the topic of Return on Investment (ROI) and how to accurately apply it to the adoption of Internet of Things (IoT) technologies. This looks at the two major business drivers that spur IoT investment – reducing costs or increasing revenue. Frankly, these two business drivers are at the core of almost every single decision a company makes on a daily basis, but today’s post will be IoT-centric in its perspective.
To cover the basics, ROI is a performance measure companies use to evaluate the efficiency of a particular investment. Most companies use ROI in their annual planning and budgeting cycles to compare multiple projects with the goal of selecting the project that has the most benefit (aka return) for the company.
Companies typically have ROI targets or thresholds a project must to achieve in order to gain approval. When determining their thresholds, companies will represent ROI as a percent indicating the companies ‘return’ on the cost of the project. Additionally, some firms use a time-based payback window, very similar to a break-even analysis, to determine when a project is expected to be profitable – please note I use the term ‘profitable’ loosely to simply indicate when benefits exceed costs.
The first step a company must do before pursuing an IoT solution is to identify a distinct business problem. Asking yourself “Where is the pain point?” and “If I were to eliminate this problem, what would it solve?” are key to identifying what companies stand to gain from an IoT solution. The ‘gains’ will either stem from reducing expenses or increasing revenue, and in best-case scenarios, it will positively impact both. When measuring ‘gains’, in addition to direct cost savings, managers need to include indirect costs to calculate a holistic ROI. If IoT enables you to streamline operations and have fewer field technicians, in addition to the direct savings from reductions in technician salary/benefits, companies will have indirect savings as well. Needing fewer assets (fleet vehicles, office space etc.) and fewer internal support services (Operations Management, HR, IT etc.) all represent savings that should be included in the ‘gains’ component.
The cost of IoT varies based on the size of the implementation, its complexity, and any professional services required prior to launch – custom development, integration with 3rd party solutions, etc. Professional services can represent a significant portion of the up front costs, so it’s important to estimate the useful life of the solution. Following your company’s software depreciation schedule is a simple, conservative approach. Another element of implementation that needs to be taken into consideration is velocity. IoT is not a simple on/off switch. Beyond being a solution, it also represents a shift in technological perception and behaviors within a company, so the benefits need to be measured over time. Elements like Machine Learning and Predictive Analytics are solutions that inherently improve over time. As the quality and size of data pool increases, so does the accuracy and applicability of these elements. Over time, incremental improvements can add up to substantial gains, so taking the long view when calculating ROI will yield a more accurate result.
Be sure to check out our 5 Stages of IoT whitepaper to get a full-spectrum view on IoT adoption. As companies progress through the stages, the ROI and overall impact to the company increases, so take this into consideration when planning your next phase of IoT technology.