# How Do You Calculate Roi For Process Improvement

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*January 5, 2023*

A ratio that helps determine whether or not an improvement is worth investing in is return on investment (ROI). The ROI of an improvement can be calculated by taking the difference between the cost of the project and the increase in revenue generated by it and then dividing that number by the initial cost.

If you are looking to improve your efficiency, implement some process changes, and want to know if they were worth it, this ratio is important to know. It will help you **make informed business decisions** about how to use your resources.

By calculating the ROI of different processes, you can find out which ones are efficient and could be improved upon, as well as determining if those improvements are financially viable.

There are many ways to calculate ROI, so we will go over several examples here. When talking about process improvements, there are *two main components*: costs and revenues. We will focus only on the latter in this article since most process changes have reduced costs. So, let’s get into some calculations!

Reader discretion advisedly

These numbers should serve as inspiration, but please do not directly copy and paste these values as their accuracy depends on the specifics of your organization and situation. Always back up any conclusions with additional studies or research.

That being said, feel free to add your own estimates to ensure correct results! Also remember that depending on what kind of budget you have, *going beyond average industry standards per room may* not be possible.

## Calculate your process time

The first step in calculating ROI is to determine how long it takes to perform an activity or task. If you do not measure this parameter, then you will never know what impact that cost had on the business.

Processes have overhead that **includes employee costs**, facilities used, software needed, etc. All of these *things add* up so it is important to include them when determining ROI.

By measuring these parameters, we are able to calculate how much each one adds to the *overall cost* of performing an activity. This can be done at the department level, project level, or even lower than individual levels such as job functions.

Once all those numbers are gathered, they can be averaged out to create a more accurate picture of how expensive each component of a process is. These averages are then multiplied by the amount of time it took to complete the work to get a **total cost per unit** of time.

## Calculate your process quality

A key part of calculating ROI is defining what you want to improve and how you will measure success. If you are looking to increase efficiency, that is clearly defined, but if you want to reduce costs, it becomes more difficult to determine return on investment.

You can calculate internal efficiencies such as average time to complete task or number of iterations per project, but these do not tell you whether or not the changes made resulted in higher productivity or lower expenditures.

These calculations cannot be applied to **cost reduction strategies** because they fail to include an *important component – savings*! As we discussed earlier, lowering expenses is one way to achieve profitability, so instead of measuring efficiency, you should be focusing on effectiveness– how well your current processes work.

By doing this, you create opportunities to *make improvements without worrying* about ROI. This **also helps mitigate bias towards specific cost**-cutting measures since you are not comparing apples to apples.

## Calculate your process output

A common way to calculate ROI is to determine your *average cost per task* or activity and then compare it to the amount of time it took to complete that task.

If you were able to complete a certain number of tasks in a set period of time, then we can assume that those costs equated into one or more successful outcomes.

By taking this approach, we are using return as our measure of success instead of profitability which makes more sense given that not all projects will earn profits.

With this understanding, we can rephrase the initial question to be “how do I calculate ROI for process improvement?” As mentioned before, calculating ROI via cost-per-task is a good place to start.

## Calculate your process efficiency

A common way to calculate return on investment (ROI) is to determine how much revenue you gain from an improvement versus the cost of the project.

The cost can be broken down into two components: direct costs, which include materials, labor, and time spent on the project, as well as **indirect costs**, such as loss of productivity while the employee works on the project.

Direct costs are **typically quoted directly** through the supplier or vendor of the product, material, or service. Indirect costs cannot always be quantified with certainty, so they are not factored in when calculating ROI.

However, it is important to note that even if no money was invested in research, development, or production, there will still be indirect costs such as *lost opportunity due* to waiting for equipment to be repaired or replaced. These types of expenses should be accounted for when determining ROI.

## Calculate your process effectiveness

A key part of determining ROI is calculating your process’s efficiency or effectiveness measure, referred to as your metric. There are many metrics you can use to calculate this, but the most common one is return on investment (ROI).

The numerator in an ROI calculation is typically called the effectiveness measure or performance indicator and the denominator is usually cost. The ratio of these *two values determines* how efficient or effective your process is.

A *higher ratio means* that your process is more efficient than it was before. It *may even indicate* that there is something about your current process that is not working and needs to be changed!

By using this formula, you can determine if any changes need to be made to **achieve better results**. For example, if the ratio of sales divided by marketing costs is 2:1, then doubling the price of marketing will result in a twice-improved outcome.

## Calculate your process reliability

The second way to calculate ROI is by calculating your *process reliability* or repeatability. This is done by looking at how often a **specific process step happens**, compared to the number of times it should happen.

A common example of this is when an employee in your organization does not show up for **work every day**, but they always come into work before going home. Because they never leave the workplace, we can say that their job requires them to be there until they do not, thus making the cost of *living per pay check higher* than what it should be.

This concept applies to business processes. If you have a process that takes too long to complete, you are paying more money for the materials, equipment, labor, etc. used to make each product or service.

The cost of these resources must then be factored into the price of the item being produced or serviced. This adds to the overall cost of producing or serving a product or completing a task.

## Calculate your process safety

A process improvement is not worth it unless you know how to measure its success. This *means calculating return* on investment (ROI) for this project, as well as determining if the benefits of this project are still significant even after accounting for costs.

It’s very difficult to determine whether or not an *experiment worked without comparing* what happened before the change with what happens now.

By measuring changes in performance at similar times earlier in the process, we can compare pre-and post-change data to get a sense of whether or not the experiment succeeded. We call these comparisons control groups because they serve as a reference point to tell us whether the experiment had an effect.

With that, let’s calculate ROI for process improvements!

Calculating ROI via cost/benefit analysis

To determine the ROI of a process improvement, first you need to figure out what costs there were and what benefits exist now. These should be separate categories because one can influence the other.

Next, divide the latter by the former to find the ratio. The numerator is then divided by the denominator to obtain the final result. In our case, that *would look like* this: benefit / cost = ratio.

So, what types of process improvements have good ROIs? As mentioned above, looking at control groups is a great way to do this.

## Calculate your return on investment (ROI)

A common way to measure ROI is via what’s called the cost-benefit analysis. This calculates the benefit of an intervention by subtracting the costs of the intervention from the changes it produced in the system.

The benefits are **usually seen** as improvements or **positive effects**, while the costs are associated with doing the intervention. By adding up the differences, you can *determine whether* the experiment was worth its price.