Return on investment (ROI) is perhaps the single most important metric for every organization or government agency to consistently measure.
While many national defense or security agencies might measure total ROI of the whole organization, not many measure or track quantifiable results when it comes to their process improvement projects. If you’re not measuring your results, then you don’t know whether your new process is better than the one you started with. Without tracking results, your improvements are blind – and not justifiable to superiors.
Instead, you should think of every project, especially process improvement projects, in terms of return on investment or quantifiable results. With a calculable ROI, you clearly communicate your agency’s overall value to the larger organization, in addition to the value of your individual improvement projects.
Furthermore, you should never hire an operations or process improvement firm that can’t prove the quantifiable results and ROI of their work at your agency.
So, how do you prove the ROI of your process improvement efforts with solid numbers? The following are some principles and practices to keep in mind:
Calculating Process Improvement ROI
Calculating value and return from processes is rarely an easy task. The most basic formula for calculating ROI is to add up your expected benefits, subtract any upfront costs or fees and then divide that new number by your total costs. The final percentage is your total ROI.
For national defense and security agencies, it is much harder to define and defend your ROI because costs and benefits aren’t always as clear, particularly when the objective is prevention of an incident. In addition, many agencies prefer not to publicize their savings so that they don’t receive a reduced budget in the following year.
However, every federal agency still needs to measure the quantifiable results of their process improvement projects, even if ROI falls under terms like “measurable value” or “return on fees.”
By far, the simplest way to demonstrate your process improvement ROI is through cost savings. Here are the three ways to calculate quantifiable results within a cost savings framework:
1. Direct Cost Benefits
Direct cost benefits are the easiest to spot from your process improvement efforts. By eliminating or reducing an obvious cost, these savings go right back into your organization’s bottom line. As a result, direct cost benefits are also typically the simplest to justify to superiors.
For example, imagine that you identify an improvement that saves $5,000 per day in printing costs. The savings to your organization in terms of ink, paper and time investment are all straightforward and the money saved shows up clearly in your budget.
2. Indirect Cost Benefits
Indirect cost benefits are also called cost avoidance. These cost savings are less clear-cut and don’t always show up distinctly on your budget. Instead, indirect cost benefits are a downstream result of an upstream process improvement.
For instance, picture that one of your processes is bogged down by a large number of customer service calls and complaints. You might enact a process improvement effort that fixes an issue early in the given process so that fewer constituents call or complain. As a result, you have to staff and hire less customer service representatives and devote fewer resources to that step in the process. While the cost savings aren’t quite as apparent, you reduced future spending by increasing present efficiency.
3. Intangible Benefits
Intangible benefits are the hardest form of cost savings to quantify but are no less important than the other two. Intangible benefits include clear positive effects from your process improvement efforts such as increased morale, enriched customer perception or enhanced clarity in the organization. Often, these intangible improvements are immensely beneficial, but only in hard-to-quantify ways. However, if you work hard enough, you should be able to quantify them – even an estimated benefit is better than not calculating benefits at all.
Consider this example: Your most recent process improvement project increased employee morale significantly according to your regular employee happiness surveys – but how do you justify that benefit to superiors? Start with an existing ROI measure for employee morale (or whatever other “soft” benefit you’ve improved) and apply it to your improvements. Then, apply this measure consistently and record the quantifiable results. When you have to justify your improvements to superiors, use this data to show how your process improvement numerically increased employee morale and thus benefited your organization.
Measuring quantifiable results from your process improvement efforts is a must for every national defense or security agency looking to defend its current budget and justify future projects. When you understand and leverage each of these three ways to calculate cost savings, every bit of value from your process improvement initiatives is properly accounted for.
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