Matt Capelli, July 2020
There is one factor above all that rules when it comes to relevant technologies: Return on Investment (ROI). Tech should either make you money, or save you money--it's that simple!
Any leader in business can be tempted by the newest and most promising technology. After all, technology has the potential to improve every aspect of the business lifecycle. But before getting caught up in buzzwords and the newest craze, it’s important to always make sure the tech you implement is relevant. There is one factor above all that rules when it comes to relevant technologies: Return on Investment (ROI). Viable technology solutions must attain a positive ROI in order for them to make sense for your business. Tech should either make you money, or save you money--it's that simple.
Although this principle is easy to get behind, many managers fail to calculate an ROI for new technology projects. For one, implementing new tech is typically a large-scale operation affecting multiple facets of your business. The task of calculating an ROI can seem intimidating to even the best of business leaders.
Another common difficulty encountered when assessing the ROI of a technology initiative is the abstract nature of the project's benefits. Managers are often sold on the idea that a solution will "increase insights" or "improve efficiency" without a measure in place to evaluate these claims. In other cases, the benefits of tech are secondary. A technology that improves services, for example smallholder training, would be expected to provide ambiguous gains to the business, such as improved relationships and a good standing in the local community. Admittedly, these things are often very difficult to quantify.
Today's article will focus on helping you effectively calculate ROIs using a simple approach to quantify the costs and benefits of any technology implementation. We'll cut through the ambiguity facing many managers and focus on real numbers and true returns, analyzing the different benefits technology can bring. Like all of our content, this article won't require you to be a technology expert. On the contrary, this ROI calculation will rely on details that you already know well for your business and operations. We'll explain why ROI is so important, the different components of an ROI calculation, and also review some practical examples from our smallholder and agribusiness technology projects. After reviewing this short guide, you'll have everything you need to move forward with confidence--knowing that your technology solutions are improving your bottom line and driving your business forward.
Let's begin with a definition of ROI as it relates to agribusiness technology projects. An ROI is a quantitative financial tool that measures the difference between the cost to invest in a technology solution and the earnings expected from more efficient operations, business expansion, and increased market share.
Put simply, think of ROI in terms of this equation:
ROI = (Money Saved + Money Made) - (Money Spent to Buy, Identify, Purchase, Implement, and Maintain)
With this formula, an ROI calculation can be broken down into components that are simply stated and easy to estimate.
Why understanding your ROI is critical
Calculating an ROI for your technology project is important for three reasons...
Reason #1: ROI's tell you if (and when) you'll make money.
The most apparent benefit of calculating an ROI is to know whether your initial investment cost can be overcome. However, understanding the size and timing of your returns is important for other reasons. Knowing what you can expect a project to return will help you gauge its relative risk and the level of effort required to ensure that the solution is sustainable. A full understanding of upfront costs, break-even points, and long-term benefits is critical in your ability to allocate and plan for the financial and human capital resources you'll need. Similarly, taking the time to evaluate the project's financials allows you to mitigate risks and balance priorities across your business.
Reason #2: ROI's are a performance measure for your business and your technology initiatives.
Most businesses are accountable to others--a board of directors, investors, or other shareholders--who want to know the value of every dollar spent and the general performance of the business. Although the cost of technology is always decreasing, technology projects normally require an abundance of time and human capital from multiple people and departments. These costs may range from the time to train staff, to a temporary pause in operations, to (in the worst-case scenario) lost productivity if tech solutions do not work as expected. Understanding the true cost of implementation lets you actively monitor whether projects are going off-course during implementation and answer to stakeholder questions about how different costs and benefits fit into the larger picture of your business's performance.
Reason #3: ROI's indicate your company's bandwidth and ability to innovate.
Room to iterate, adapt, experiment, and grow comes directly from a favorable ROI. Technology projects with high ROIs offer financial buffer room and a higher chance for success. Simply put, the business benefits of technology are compounded with larger ROIs because a higher return leaves you with more opportunity to push forward with new or more advanced digitization goals.
Calculating your ROI
Enough theory! Let's look at some practical examples:
Remember our formula from above?
ROI = (Money Saved + Money Made) - (Money Spent to Buy, Identify, Purchase, Implement, and Maintain)
Let's keep this equation in mind while we explore the strategy of a fictitious company that is a sorghum aggregator in Ghana, "Tamale Sorghum."
Amount of money you'll save
You can save money in two ways
Although technology's benefits are mostly related to time saved, other use cases may include decreasing waste, fraud, or theft. Be sure to think through all of your expenses on a case-by-case basis and determine if technology can help.
The easiest way to start when calculating the ROI of a technology project is to assess the time it will save you and your staff. In most cases, implementation will make your operations more efficient (for example, automatic report generation).
Let's say that Tamale Sorghum identified a particularly cumbersome report that is compiled daily while they were working through their requirements. As they initiated a pilot test for their field data collection application, they set out to understand their ROI.
In this example, the daily report consumes two hours of the day for each of the five field officers. We can calculate the total time as:
5 field officers * 2 hours/day * 5 days/week = 50 hours/week
50 hours/week * 48 working weeks per year = 2,400 hours per year to compile daily reports! That's more than an entire Full-Time Equivalent (1 person working full time for a year).
With a simple calculation, we've discovered the enormous cost of this daily report, which we can put in terms of actual costs by multiplying the total hours by the approximate hourly rate of the company's field officers. The result is a great estimate of saved time and costs, which we can now use in the ROI calculation.
Now that we have a pretty good sense of the scale of savings, it's important to also account for other positive effects, such as a reduction in expenses.
Let's say Tamale Sorghum incurs the following expenses from the field officers compiling reports:
The cost of these resources, when considered over an entire year, could be enormous. We should add these into our calculation as well.
Amount of money you'll make (new opportunities)
Using time savings as a foundation, the ROI calculation can be expanded to include the value of the time saved if used for other activities. This practice will align your ROI calculation with the true operating environment of the business.
Time savings can provide your staff with new opportunities to grow market share or enhance brand awareness through activities such as smallholder training. Your staff might also spend time training their peers, learning new skills, or improving other aspects of your operations. All of these considerations can indirectly impact sales. Let's examine how these factors can be incorporated into a quantitative assessment of potential opportunities.
Suppose Tamale Sorghum freed up 2,400 hours per year for its field teams. With this extra time, how many more smallholders could be reached? Can operations expand to a new region? What profits could be expected from such an initiative?
Let's say that the field officers can now spend their saved time training new farmers, a priority for the company. We might estimate that the time saved by the project will allow each field officer to train farmers in a new area each week. This estimate is based on the other responsibilities that field officers have and the fact that new training takes approximately 8 hours to complete (including travel). Our calculation would then be
5 field officers * 8 hours per week * 48 weeks = 1,920 hours of new training per year, which fits comfortably into our original 2,400 hour allocation.
In practice, this means that Tamale Sorghum can now accomplish:
5 field officers * 48 trainings per year = 240 new training sessions per year
Suppose further that new farmer training groups receive 4 trainings per year based on Tamale Sorghum’s training modules, allowing for:
240 / 4 = 60 new training groups per year
And since a training group averages 25 smallholders, the final estimate for new outreach, in terms of smallholders, is:
60 training groups * 25 smallholders/group = 1,500 new smallholders
Given Tamale Sorghum's priorities, perhaps just knowing that 1,500 new smallholders will be impacted is worth the time and cost of the technology alone. From an impact reporting perspective, this is a fantastic ROI (albeit one that is qualitative). It speaks to the value of technology's potential: automating just one report can translate to impacting 1,500 new smallholders annually--incredible! But, let's not settle just for the prospect of knowing the overall impact--let's keep driving toward numbers that the business can use and take it one step further to understand the true financial return.
Suppose that historical procurement data suggests Tamale Sorghum can procure sorghum from 75% of trained farmers because the farmers know and trust the company. This would result in 1,125 new farmers partnering with Tamale Sorghum. We might ask first and foremost, how does this impact the company's working capital, and do they have the cash flow to support this? If so, how does this impact that company's potential market opportunities? Are there new or larger contracts they can take on? Are there cost savings to be expected from economies of scale and larger volumes?
Only you can answer these questions for your company, but hopefully you can see now that ROI calculations don't have to be complicated to estimate a return. For this example, let's assume that Tamale Sorghum can now take on a new $20,000 contract, with an expected profit of $2,500, since they are sourcing from 1,125 new farmers. Not only has the company improved their reputation and made their impact investors happy, they have also increased their revenue and profit! The following year they might even take this additional profit to further automate and digitize their operations.
A quick note: When thinking through a new opportunity, it's important to be conservative. Do not exaggerate the potential impact by dreaming of the best-case scenario, because doing so can inflate your estimation of a return. While this may seem like a good short-term practice, as unexpected costs and market dynamics impact the project over time, the long-term benefits of the technology are less likely to be realized. Instead, make conservative estimates to accurately plan and prioritize initiatives. Then, the only surprises will be outperforming expectations!
Understanding the true costs of technology implementation
Don’t get too excited yet! We are still missing a few critical components of the ROI. Until this point, we've considered the benefits of technology, but we haven't yet accounted for the costs. The calculation of technology costs will be more than just license and development fees. It will also include the time you and your staff spend to identify, implement, and maintain the technology. Even when using free tools, you'll still incur costs for your time--time that could be spent doing other activities that benefit the business such as selling, training smallholders, performing community outreach, or working on other internal processes at your business.
Let's dive into that now. You might be surprised at the result! Tamale Sorghum has opted to use a free survey platform, therefore, the cost of technology is zero. But what are the true costs?
To add credibility to our example, let's pull in some real numbers from an AgDevCo project at Shares Uganda. These are the true numbers from an effort to pilot a free survey tool on just a fraction of the company’s operations:
Initial coordination, plans, and acclimation to the new tech:
Designing, preparing, testing, improving, and approving the technology solution:
Training, onboarding of field staff, and final adjustments:
Data entry using new digital tools:
(Remember! Time for data entry might be reduced, but won’t be zero!)
That's over 2,000 hours just to design, test, and implement a free survey tool for field data collection in a pilot project! As you work through your implementation’s cost analysis, think through the time you can commit to supporting the design and development of the project, including time for meeting with technology providers, documenting your requirements, testing and approving, and facilitating training. It doesn't have to be a perfect estimate. Even rough numbers can give you a good sense of the resources that the project will require. Plan for these costs before starting so that you aren’t caught off-guard during implementation!
After considering these costs, compare them to the value of the technology. What would be the total financial savings if digital data collection reduced report compile time to 1 hour per day, saving 1,300 hours per year? What if the report was completely automated, and the field officer takes just a few seconds to review and approve it?
Note: The 2,000 hours of total time from our Shares Uganda example is a large investment, and numbers of this scale may seem intimidating at the outset. However, consider it alongside the scale of the business operation itself. For example, Shares Uganda employs 120 field officers. If this technology solution saves each officer even just 2 hours per week, that's still a total of
2 hours * 48 working weeks * 120 field officers = 11,500+ hours saved each year--well worth the effort!
But wait...there's more!
For our example with Tamale Sorghum, we’ll pause at this point on our ‘official’ ROI calculation, as we’ve reached the limit of what we can reasonably estimate. With time, we may be able to further incorporate other benefits. For example, we have not yet considered the value that improvements in smallholder training might provide if more interaction with farmers leads to increased yields or reduced loss from pests. We might hope to see higher yields and pest reduction in future seasons, but at this time, we are not certain if this will be the case. Staying mindful of potential (additional) benefits can create context and confidence moving forward, but be careful not to include them directly in your ROI calculation unless you are sure you can place their expected gains to actual metrics! Strictly speaking, we want the ROI to be based on purely quantitative factors that are tied back to either saving or making money.
Recognizing qualitative or secondary benefits above and beyond your ROI is also an important component in spotting new opportunities. Can you place a value on the insights you might have if a new technology was implemented? If reports compile automatically, can you increase data collection? The improved planning capabilities could allow you to spot new market opportunities, provide better services to smallholders, and optimize the time of your staff. Even if you can't calculate the exact value of these benefits, reverse the question for a moment. Consider how much you would pay for these insights if someone could give them to you. Although these numbers should not be included in the ROI, they are important "bonuses" to consider that can give you the confidence to move forward with a project if its ROI is positive but not exceedingly favorable.
When should ROI be calculated?
The short answer is...always! At the start of every project, perform a detailed estimate of the ROI. Its baseline value reflects the project's potential. Moreover, as you progress through major milestones of the project, re-evaluate the ROI. Are things taking longer or costing more than expected? This process of adjustment allows you to continually monitor the project's risks and potential. Finally, once the project is complete, do a final estimate of your ROI to improve future calculations. How did the real cost of labor compare to your original estimate? Was the technology solution as efficient as expected? In the example above, we would look at the number of smallholders we reached throughout the project compared to our ROI estimates. We'd also assess the realized time savings from our report automation versus the two hours of saved time we expected.
Was Tamale Sorghum able to reach 1,150 new shareholders the next year? Did they maintain a purchase rate of 75%? These types of questions will help us to know if estimated numbers are lower than expected and if the ROI should be adjusted going forward. In contrast, if the estimates remained conservative, fantastic! The true ROI is almost certainly higher than expected, and there is more room to experiment with new and innovative tech in the future.
While ROI calculations can seem daunting, remember that time is money, and both time and money are quantitative. As long as your strategic decisions are grounded in these elements, we can always make a reasonable estimate of a technology project's ROI.
Originally posted at Simple Data Tools.
AgDevCo’s Smallholder Development Unit is supported by the Mastercard Foundation and UK aid.