Discussions about ROI shouldn’t be the exclusive domain of Finance, Hedge funds, or Investment Bankers—ROI should be an everyday concern for all of us in any role. Whether you’re in sales, facilities, operations, support, or marketing, we should all be thinking and acting with commercial and business focus for our employers and our customers.
A commonly held belief is that when referring to IoT (the Internet of Things), ROI is only applicable to large projects. In this blog I want to debunk the myth, and establish how ROI may be measured in a plethora of IoT projects.
Spoiler alert: this is not a finance blog. However, in return for your investment of three minutes reading my blog you will gain three actionable insights that might be relevant to your business!
What do we mean by ROI?
A crucial starting point is to establish what we mean by ROI. On paper, ROI could not be simpler. To calculate it, you simply take the gain of an investment, subtract the cost of the investment, and divide the total by the cost of the investment (ROI = (Gains – Cost)/Cost).
The dollar value of the return is meaningless without considering the cost of the investment. For this reason, the costs of an investment, both initial and ongoing, are an essential piece of information for any business analysis.
Making ROI more useful
ROI is a simple calculation that tells you the bottom line return of any investment. The operative word, however, is simple. It’s worth noting that one major factor that doesn’t appear in an ROI calculation is time. Imagine project A with an ROI of 1,000% and project B with an ROI of 50%. Easy call–put your money in the 1,000% one. But, what if project A takes 30 years to pay off and project B pays off in less than a year? This is when time periods come into play and analysis must look to CAGR. The compound annual growth rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer than one year, which gives 25% for project A compared with >5,000% for project B.
ROI in IoT: Why size doesn’t matter
There are four components critical for a successful IoT project—devices, connections, data and analytics. When all four components are present the player is brilliantly placed to execute and deliver a successful IoT project.
An approach that allows close analysis of each IoT component will show there is an individual ROI for the component as well as an overall ROI.
Vodafone research in 2016 showed that small IoT deployments (<100 connections) showed the same significant ROI as large deployments (1000> connections). For example, take an energy company remotely monitoring 100 high value wind turbines, thereby avoiding days of unplanned downtime, or equally a retailer with 500 digital signs that drive increased sales through real-time promotions. In each case, the quantity of connections may be low, but the impact on the efficiency and effectiveness of a business process could be tremendous, significantly lifting the ROI.
The same research makes a point that is probably the single biggest insight into the question how any size IoT project can deliver ROI by valuably shedding light on how ROI can be leveraged in any project: shift the focus away from “revenue” gains.
In addition to ‘increased revenue’, at least 30% of businesses at all levels of maturity report measurable benefits across 12 KPIs (key performance indicators). These KPIs can be summed to enormous benefit beyond those of a simple ‘revenue based business case’ and include:
- Delivery consistency;
- Staff productivity;
- Decision making;
- Customer experience;
- Internal oversight;
- Supply-chain insight;
- Reduced cost;
- Safety and security;
- Reduced downtime;
- and Asset utilisation.
Clearly some will be irrelevant in certain projects but an awareness and process that at least gives some consideration for them for any project will pay dividends, and deliver a gain in ROI, which is especially important in small projects.
The 3 insights
- Begin solving a customer requirement by asking “why?”
Why do they want to do that?, Why is that achievement important? As opposed to the usual just asking, “what do you want?” This approach opens the conversation towards covering all four IoT components, and more importantly, gets the most important question answered: What the customer needs, not what he wants. Consequently, the ‘Gain” component of the ROI calculation is much easier to identify and will be larger.
- The 3 green light test
More is better than less.
Sooner is better than later.
Certain is better than uncertain.
If you get 3 green lights on these, do the project. Any less than 3, then at best your ROI diminishes or disappears completely. If two are green, you could divert some effort to explore., One green = avoid.
- Other actors in the use case will gain
therefore include a contribution from them in the return and you automatically lift the ROI.
Taking your first steps in IoT? We can help. Contact us here and we’ll get you set up with an ecosystem of connectivity, devices, and solutions, all with actionable analytics.