A Science And An Art
It's always been important to manage the credit union budget wisely. But today, it's more critical than ever. The squeeze on investment rates is creating pressure to make more loans, generate more non-interest income, and spend more prudently. As margins shrink, so does the margin for error when it comes to spending-as every dollar allocated unwisely means a sacrifice elsewhere. For these reasons, credit unions are stepping up their efforts to measure ROI, especially when it comes to technology. Calculating the ROI of a technology initiative typically involves assessing three types of expenses: hard costs, "softer" hard costs, and soft costs. Hard costs are the easiest to assess, especially when they involve a displaceable expense. For instance, if you're upgrading from microfiche to optical technology, you can compare the known expenses for microfiche equipment purchase and maintenance to the known expenses for optical hardware, licenses, and platters. It's a little tougher to assess the "softer" hard costs. For example, optical technology allows you to eliminate printing hard copy reports, but you're not likely to eliminate them 100%. Accurately calculating the savings is possible, though less exact.
The toughest task tends to be assessing the soft costs. And of those, one of the most often overlooked is the cost of your staff's time. You need to quantify the value of that time, especially when evaluating technologies that will eliminate manual work and reduce labor costs; but if you only consider salary, you're missing part of the picture. Be sure to factor in a "fully loaded" cost, including wage taxes, healthcare, and other expenses.
When There's Internal Resistance
If you find internal resistance to calculating labor savings, remember that the goal isn't to lay off people. Eliminating manual work creates an opportunity to grow without adding staff, or to redirect your resources. There's rarely enough staff to tackle all of your top priority projects, let alone the "B" list. When you swap manual work for automated processes, you're able to redeploy staff toward important initiatives that need attention.
Another consideration is the project's potential effect on your reputation. Members expect to do business with a well-run organization; so if your processes are perceived as sub-par, you could lose their confidence and their business. Though you can't place a dollar figure on the cost of a reputation problem, it's certainly a factor worth considering.
While an ROI calculation is important, it shouldn't be the sole driver of every technology decision. Some initiatives may not demonstrate a high ROI, but will be critical to your competitive position. Internet banking is a good example: It's gained "must-have" status- not based on hard dollars, but on its ability to attract and retain members. For initiatives like this, it's still important to calculate the ROI- not to rule the project in or out, but to determine its impact on the credit union.
Which projects need an ROI calculation? That depends somewhat on your credit union's culture. Your board or CEO may require it for all, some, or none of your technology projects. Regardless, a good best practice is to establish a dollar threshold and agree to perform an ROI analysis for any project with an expenditure in excess of that threshold.
When you're ready to calculate an ROI, be sure to weigh all options first. Let's say you're using two-part receipt paper with old printers that need upgrading. Before replacing the equipment, consider whether a change in your process is a better move. You might achieve a higher ROI by implementing a receipts-to-optical solution that eliminates the 2-part paper, avoids the printer replacement, and eliminates the labor and consumables needed to scan and store receipts.
It's equally important that the credit union involves the right players in this exercise. At a minimum, solicit input from finance (to ensure a sound financial basis for the analysis); operations (to include and accurately assess all costs); and IT (to assess integration with current technology infrastructure). It also helps to get buy-in from the departments affected, as the ROI needs to be credible with this group- based on believable projections that encourage their ownership. And don't forget to look outside your credit union for help. Your auditor may have cross-industry experience with this particular technology. Other credit unions that have already implemented this technology may have useful advice, while your technology partner may be able to offer parameters based on their experiences with other clients.
Finally, once you've developed an ROI, don't be wedded to it too closely. Spreadsheets are easy; the real world is quite another story. Your ROI will be affected by variables such as market conditions, your staff's capabilities, the quality of the software or hardware you've purchased, and the success and timing of the implementation. While your actual experience may vary from your projections, calculating an ROI should always prove fruitful-as it helps you plan, builds credibility and confidence within the organization, and provides a good starting point for when the next project inevitably rolls around.
Terry Murphy is Senior Vice President of USERS Incorporated. He can be reached at TerryMurphy