Consider for a moment that one four-drawer file cabinet:
- Holds 15K-20K pages of paper
- Costs $25,000 to fill
- Costs $2,000 per year to maintain
How do you justify such a wide scale project in your office? Start by calculating the ROI of a proposal to go paperless or for proposing upgrades to servers, software, hardware, or anything else that has to do with your project. Typically, such a task seems daunting. Perhaps you want to measure the ROI of a change you made, and you’re either lost at how to do it or overwhelmed at the time it will take to track and measure it.
It isn’t always easy to put down and quantify on paper what you know in your head and in your heart: Yes, it will have a positive impact on the bottom line. What happens if you’ve done the homework in the proposal stage, and you become accountable for it? How are you supposed to measure it? How much time should you invest in tracking every financial aspect of something just to say it was a good recommendation.
Some people pick up the gauntlet and proceed to propose a ROI and then attempt to track it while others choose to avoid the whole ROI thing. The reality is that if you expect to save money you need to embrace the concept of ROI and learn how to measure it effectively. Let’s start with a simple equation that every first year accounting student would understand.
- How much is it going to cost (initial investment and on-going costs)?
- How much money is it going to make?
- How much money is it going to save in the first year and every year after that?
From here, figure the ROI. The formula is:
($Earnings + $Savings – $Cost)/$Cost X 100 = ROI %
Calculating the Cost of Paper
According to INC Magazine:
- It costs $20 to file a document,
- Or $120 to search for a misfiled document, and, if you can’t find it
- It costs approximately $250 to recreate a lost document.
Extend this formula into cost justification and ROI for the purchase of a new computer. The cost of the new, appropriately equipped computer is $1,500. In this example, there is nothing wrong with your old computer; it simply isn’t fast enough. Consequently, as part of the proposed ROI, we need to determine what is to be done with the old computer. In this example, the company sells it to someone for $500. Hence, the net cost of the new computer is $1,000.
Now, you need to determine how much faster the new computer is. Yes, those processor speeds are wonderful guides, but we need to be realistic. If you double the processor speed, you don’t double your productivity. Before you start your ROI calculation, stop and think about how often you’ve waited for the computer to finish processing something before you can proceed.
With this knowledge, you can quickly figure out how much it is costing you by taking the number of working days in a year and multiplying it by hourly wage. For this example, suppose the old computer is costing you an average of two minutes 15 times a day for a total of 30 minutes a day. That is approximately 120 hours a year. If you’re paying $15 hour, that amounts to an annual cost of $1,800 a year. Now, estimate how much time the new computer will save you. Realistically, you’ll never be able to recoup all that time, but let’s assume you can reclaim 50% of it, or $900 in the first year. In your proposal for the new computer, you will want to see a positive ROI, but if you only plug in your numbers for the first year, you’ll get a negative ROI of (900 – (1500-500))/(1500-500)*100 = -10.0%.
However, remember that the new computer has a life expectancy of at least 2 to 4 years on your desk, and those savings continue into future years. Therefore, the real ROI in this case needs to cover the second year and so forth. With this in mind, you see a two year ROI projection of (900+900 – (1500-500))/(1500-500)*100 = 80.0%. Now, what business owner wouldn’t approve an expenditure that yields a return of 80% in just two years?
This is a simple example, but it’s enough to give you a good idea as to how to proceed, and, most importantly, why you need to take these steps. A conservative estimate is that a targeted document management effort can return as much as $20.00- $40.00 for every dollar invested. That’s pretty good by anyone’s standard, and most of us would be happy with even two dollars for every one invested!
The reality is that the ROI can be measured for everything. Practicality dictates that you should only measure what you can effectively measure to the extent that getting a more detailed measurement is going to cost more than the potential savings. When evaluating the cost of paper in your office, be realistic, but measure how paper is used. See what is stored and how the information is retrieved, if it is ever retrieved. Bring co-workers in on the project and measure the time spent looking for missing documents, re-creating documents, and filing documents. Evaluate lost worker time traveling to file rooms, printers, and copiers. Considering the many surveys which have been done on productivity, you should be able to substantiate your investment based on the facts.