Glossary · Return on investment (ROI)
What is return on investment (ROI)?
Definition: Return on investment (ROI) is the ratio between the benefit an investment generates and what it costs, usually expressed as a percentage.
The basic formula subtracts the investment from the benefit obtained and divides the result by the investment. In an automation project, the annual benefit is usually calculated by comparing the cost per case before and after, multiplying by volume and subtracting the annual cost of running the system. If an investment generates net savings of one and a half times its cost in a year, the annual ROI is 50%.
In a business, ROI is used to compare projects and decide which to tackle first. Calculating it rigorously requires a baseline: measuring the process before changing it, with real data on time per case, volume, errors and lead times. Without that measurement, any later figure is an estimate that is hard to defend in front of the board.
ROI does not capture every benefit. Fewer errors, shorter lead times, traceability and less dependence on key people all have value, even if they are hard to translate into money. It is usually accompanied by the payback period, which shows how long it takes for cumulative savings to match the investment. Be wary of generic figures promised before anyone has analysed the process.
Example: an invoice process that takes 300 hours a month needs 60 after automation; that measured saving of 240 hours a month, valued at its real cost, is the basis for the ROI calculation.