Return on Investment (ROI) is a measuring stick used to evaluate the success of an investment. ROI is also used to compare the efficiency of a number of different investments side by side. It tries to directly measure how much return is made relative to the investment’s cost. It’s an easy formula that will tell your company if they made a good decision or not. Investments for a company can be anything from hiring a new employee, buying new equipment, or buying custom software solutions. Any expense for the business is an investment in said business. To figure ROI the value of the investment is divided by the cost and expressed as a percentage.
Hard Return on Investment
ROI is further broken down into subcategories that allow companies to put a finer point on their investments. Hard ROI is easy to quantify and will directly impact your company’s success. By looking at gains and expenses as a whole or on a per project basis hard ROI tells the company very plainly whether or not a good decision was made. The number are the numbers and there is no hiding from them. For example, if a manufacturer paid $100,000 for a new widget machine and that machine made 25,000 more widgets last quarter would give the company a 75% ROI. Not too bad, right?
This type of return on your company’s investment is very easy to point to as justification for spend and tends to help move the decision-making process along quickly. Even if the initial spend is high, you know that it will pay for itself over time before turning a profit.
Soft Return on Investment
Hard ROI deals in numbers and facts, things that can be counted and proven on a ledger. There are numbers to plug into the formula and that result will tell you if you did well or not. Soft ROI isn’t as easy to figure, it’s more subjective and open for interpretation. When calculating soft ROI the other factors that contribute to business success are in play. Things like employee retention, morale and productivity, positive company culture, and brand recognition are the purview of soft ROI. These metrics are not easily recorded but they can be seen day after day in the workplace and they will eventually show themselves on the bottom line.
If a company invests in a custom software solution that eliminates a manual process, it’s easy to point to the hours saved each week and calculate how that affects the bottom line. The soft ROI in this case is that with this extra time, these employees are now able to spend their time on more important items.
Both are Important for Success
The only way for a company to fully understand the ROI on any investment, the hard and soft data must be considered. They share an equal part in any investment. Calculating the actual return and the overall impact it had on the company and the workforce at large is the only way to know if it was worth it or not.
As technology continues to improve and more processes become automated, the importance of soft ROI will continue to increase. When making any investment decisions for your company, it’s imperative that you consider every potential source of a return.