How To Calculating Roi For Process Improvement

January 5, 2023

The term “return on investment” (or ROI) is typically used to describe how effectively an organization or company invests its resources. For example, if your employer invested 10,000 in new equipment, it would be calculated as the ratio of return over cost.

The same concept can be applied to process improvement initiatives at work. A lot of organizations struggle with what they refer to as the “internal cost of change.” This includes things like staff time spent on projects that do not bear fruit, loss of morale from those who feel left out during project meetings, etc.

With this article, we will go into more detail about one of the most important concepts related to ROI when investing in process improvements — average incremental effect (AIE).

Calculate your return on investment based on time

how to calculating roi for process improvement

Time is one of the most important metrics in business, and it’s very easy to misapply or miss this key piece of data.

Time is how long an activity takes to complete, not what happens to you while you are working on something. For example, if a business spends two hours each week cleaning its office space, then we can’t calculate ROI based on whether the room was clean when it opened every morning because that time span wasn’t invested in making the office space clean!

Instead, we have to look at the time as an investment in making the office space more organized and tidy, which creates a lasting benefit that can be calculated using our formula. We use the same principle here with process improvement initiatives.

We measure the time it took to implement a new process as opposed to just measuring the time it took to go through the steps of the old process. The difference between those two times isn’t meaningful unless you compare them across different time frames, which means we need another variable.

So, we add to our ROI calculation the average amount of time it typically takes to implement a similar process within your organization.

Calculate your return on investment based on process change

how to calculating roi for process improvement

A common way to calculate ROI is to determine the cost of what you are investing in, and then compare it to the increase in revenue generated by the changes.

This method can be adapted to fit almost any business, as it does not require exact numbers or timing information. It is simply comparing what you have with what you were before!

By this measure, even changing an activity that you currently pay to do could yield significant rewards if done correctly.

Process improvement (PI) often times is described as doing something better than before to make people feel more comfortable with how things run. These changes may include altering how meetings are organized, creating new procedures or guidelines, or introducing newer technology into offices.

Calculate your return on investment based on quality

how to calculating roi for process improvement

A common way to calculate ROI is to use the effectiveness of a product or service as the numerator and time spent using it as the denominator. The ratio of these two values gives you your ROI.

The numerator in this case is the quality of the product, system, or service. More effective products are those that help people do their jobs better. They fulfill an need by improving upon what else is out there.

Effective services and systems reduce cost or increase efficiency which makes them more appealing than alternatives. When looking at process improvement initiatives, you can determine how much value they bring to the organization through its effect on productivity, efficiency, and/or reduced costs.

These types of initiatives often include new technology, change management strategies, and/or improved communication processes. All of these add value to the workplace and contribute to the success of the company.

They also take up staff resources which can be calculated using the workload formula we mentioned earlier. By calculating the amount of time invested in each project relative to the workload, you get an average per-unit rate which can then be plugged into the equation for ROI.

Calculate your return on investment using the 5 Whys

how to calculating roi for process improvement

The “why” question technique is one of the most powerful tools in business. It was first described by W. Edward Deming, an American management expert who taught that successful leadership involved asking why things went wrong repeatedly until you uncovered the underlying cause or causes.

Once you have identified the root cause, then you can take action to prevent it from happening again. This way, you continue improving the process so that it doesn’t happen often. It also helps you figure out what needs to be changed next time to make sure similar situations don’t occur.

To use the "why" questions effectively, though, you need to ask them with sincerity and without any rhetorical tricks. Try being completely honest when you ask each question.

Here are some examples of the 5 Why questions in process improvement settings. You can mix and match these depending on how much information you get from each one.

Use the 5 Why analysis to improve processes

how to calculating roi for process improvement

The first step in calculating ROI is to determine what your goal is. Is it reducing customer complaints? Increasing revenue? All of the above?

The way you measure success will dictate which steps are needed next. For example, if your goal is reducing complaint numbers then gathering data about the service people receive or testing new procedures is important.

If your goal is increasing revenue, then offering better services and higher quality products is necessary. And so on.

Once you have determined the purpose of the improvement, then you can work towards achieving that aim by doing an activity review. This means looking at how well the current process works and whether there are ways to make it more efficient or effective.

After this, think about why these changes need to be made. What problems exist with the current system that could possible cause loss of business or poor performance?

Then, determine if those reasons seem strong enough to push through with the change.

Measure customer satisfaction

how to calculating roi for process improvement

A strong ROI measure is calculating the return on investment (ROI) in terms of increased customer satisfaction. This can be done via surveys or questionnaire questions, which ask customers about their experience with your business and whether it made them feel better about you as an organization and company.

The average size of a survey question is five items, so asking around twenty-five questions per survey is a good benchmark to aim for. It’s important to remember that respondents may not give fully honest answers due to stigma or fear of reprisal, but you will get some very valuable data this way.

Surveys are typically cost effective since you can hire individuals online to do time sensitive research projects such as this. You can also use free resources to create your test before investing in a more professional looking one.

Measure employee satisfaction

how to calculating roi for process improvement

A more common way to calculate ROI is through measuring employee satisfaction or engagement. This can be done with either an internal survey or via social media sites where people give their opinions about the workplace.

The most effective ways to measure engagement are by asking questions such as “how engaged were you with your job over the past week,” or “to what extent did you feel valued at work today?’’

These types of questions probe not only whether employees felt they received praise and recognition for their efforts, but also if they perceived that their leadership cared about them as individuals and helped motivate them.

By using both closed-ended (yes/no) and open-ended questions, you get much deeper insight into how engaged employees really are. You will also get a better picture of just how motivated some employees truly are because there is no clear answer like ‘very engaged’ or ‘highly motivated.’

Instead, you may find that some employees replied with something like ‘not very much’ or ‘not at all.’ These less positive answers show that perhaps there is a need to address why certain people feel undervalued or unappreciated.

Compare processes to best practices

how to calculating roi for process improvement

A common mistake that new professionals make is looking at the process they have now as the ultimate standard. This can be difficult because there are so many different ways organizations manage their business, from marketing strategies to what products or services they offer.

It is very easy to get distracted by all of the other possible variations that exist and not focus on how well your current process works.

By putting more emphasis on improving the process you have now, you may lose sight of the true goal — better results!

Your initial process may work well for your organization, but it might not be the most efficient one. If yours isn’t working, try to determine if there are any underlying reasons why.

There could be something in the materials it takes to perform this task that are no longer needed, or equipment that has been upgraded thus making its job obsolete. You need to evaluate whether or not these changes made sense financially.

If they did, then update those materials, find replacements for the outdated tools, and see if those improvements helped your staff achieve their goals.

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