R.O.I. or B.S. (Part 2)

ROI or BS – Part 2

Analyzing a Return On Investment (ROI) proposal.

Return On Investment is just another fancy term for Cost Vs. Benefit Analysis. You analyze a proposal which claims if you purchase a specific product or service you would eventually gain savings or revenues that exceeded your initial investment. That’s all well and good, but like I said in my first post, not everything is as it seems and some ROIs are based upon completely fictitious and grandiose assumptions.

There are some significant issues you should be concerned about when performing your analysis. ROI’s are usually based upon known historical and measureable costs that are associated with a specific activity, such as: fuel, maintenance, operational, and accident costs etc.  ROIs should not be considered a guaranteed measure of performance or cost savings. ROIs that make assumptions based upon future activity are likely to be less accurate because the benchmark variables will tend to change over time. Keep in mind that the more variables an ROI contains the more difficult it will be to measure, and in turn, the less accurate the ROI may be (positive or negative). The same logic can be attributed to business planning. Back in my college days our business professor always emphasized the obvious fact that the further out we forecasted our business plan … the less accurate it would be.

So what can you do to decipher the numbers and determine if pursuing a particular product or service is right for you? Here is a list of specific questions you should ask yourself when performing your own analysis.

THE COSTS:

1. What are the up-front costs?
   • Parts/materials.
   • Installation.
   • Training.
2. Product lifecycle.
   • Will you need to replace or exchange the item during the course of its use?
   • Is the product fully warrantied against premature failure?
   • Does the product warranty extend beyond the ROI investment period?
3. Training costs.
   • How many employees will be affected by the training?
   • Does the training have a shelf-life? Will you require periodic retraining?
   • Are the before and after training performance factors tangible and measureable?
4. Cost of specialized tools or equipment.
   • Will you need to purchase additional tools?
   • What is the lifecycle of the tools?
5. Are there any ongoing or reoccurring costs?
   • Software updates.
   • Yearly technical assistance service charges or license fees.
   • The need to purchase additional operating supplies or spares.
6. Will you incur price increases after the committed or contractual trial period?
7. What are the costs of inaction (if you did nothing)?
   • Also referred to in economics as the Opportunity Cost.
   • How much you are losing each month by waiting to make a decision?
   • Would your costs remain stable if you decided not to implement the proposal?

THE BENEFITS:

1. Will there be any decrease in overhead, operating, or equipment expenses?
2. Are there any gained efficiencies that will cross-over into other operational areas? This includes functional areas outside of fleet management?
3. Can you reduce staffing requirements with efficiency gain offsets?
4. Does the product or service provide non-monetary value, such as environmental benefits?
5. Can the “before and after” performance/cost factors be quantified and assigned monetary values?

OTHER FACTORS TO CONSIDER:

1. What is the time period required (as cited by the manufacturer) to recover your initial investment?
2. Is the ROI incremental?  Do the savings occur at certain points along the ROI period or at a specified point in time?
3. Will the equipment being modified retire from the fleet early, or before the end of the ROI period?
4. If initiative or project requires a multi-year commitment, what anticipated cost increases will you incur?
5. Are there any ongoing or periodic maintenance requirements?
6. Does the use of the product increase your maintenance labor requirements?
7. Will use of the product or device reduce a vehicles residual value at the end of its lifecycle period?
8. Will the initiative have a corresponding positive effect on parallel business processes such as shop safety, workers compensation, or hazardous waste?
9. Will the proposer guarantee (in writing) a specified ROI period, and apply specific penalties/restrictions if they are not achieved? Is there a money-back guarantee?
10. Does your Fleet Management Information System have the capability to accurately track and measure the necessary performance data? Are the tracking requirements burdensome and time-consuming?
11. Operational Variables – Does the vendor’s ROI operational assumptions match those of your fleet? Here are some variables to look for:
    • Annual accumulated mileage
    • Annual fuel consumption
    • Cost of oil changes and/or PM services.
    • Labor rates
    • Type of equipment (year, make, model)
    • Size of equipment (engine, horsepower, gross vehicle weight, etc.)
    • Does the equipment operating conditions used to verify the ROI match yours?

                                              i.            City versus rural driving.
                                             ii.            Mountainous versus flat terrain.
                                            iii.            Bio diesel versus conventional diesel.
                                            iv.            E85 versus conventional gasoline.
                                             v.            Are the vehicles hot-seated (as is the case with Police cars)?

If you wish to learn more about ROI analysis contact your local college or university and inquire if they have a course in ROI Analysis. Some institutions teach ROI analysis and provide certificates upon completion of the course. Remember, you have the fiduciary responsibility to validate that the proposal will work, because in the end, no one will care what claims the manufacturer made on their behalf.

Questions, comments, or suggestions?

Anonymous

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