The simplest definition of ROI is that, for any project or purchase, it's the amount saved or realized minus the cost to invest. If we spend $75 for a new fundraising widget for our website, and we make $125 in donations from it, then our return on investment is $50.
Or maybe not, because we invested in web developer time to deploy the widget to our website and staff time to process the donations. Plus, we spent a portion of each donation on credit card processing fees, right?
So ROI is not a strictly financial formula. Actual ROI is based on many factors, including hard-to-quantify things such as organizational culture, training, and readiness for adoption. The benefits of a major tech investment are proportional to the readiness of your particular organization.
Let's try another example. We'll spend $2,000 to upgrade to a new version of our fundraising system. It boasts better reporting and data visualizations, which, per the salesperson, will allow us to increase our donations by 10 percent. We think we'll make $10,000 a year in additional donations, and expect the upgrade to benefit us for two years. So the strictly financial return is $18,000 ($20,000 new revenue - $2,000 upgrade cost).
But that 10 percent increase isn't based solely on having the new features available in the product; it's based on using the new features strategically, which your staff might not know how to do. It assumes that the software will be configured correctly, which assumes you are fully cognizant of your needs and processes related to the information that the system will manage. And it assumes that you have a staffing level that might be larger than you can afford.
The concept here is pretty simple: it is easier to bake a cake from a recipe if you buy the ingredients beforehand. Then you need to have all of the required mixing implements and receptacles, clear the necessary counter space, and know how to turn on the oven.
Similarly, successfully calculating the return on investments requires having a complete picture of what you will be investing in.
There are some techniques for calculating ROI. As noted above, you should start with metrics that identify your current conditions and can be tracked after implementation. These might be dollars received, hours spent doing tasks, or number of employees dedicated to a process. Consider this your baseline. From there, you can forecast a scenario based on the advantages that you anticipate having upon completion of the project.
For example, if your current fundraising system can't track multiple donors at the same address, then you're probably expending time and effort to track such things in creative ways. A system that properly supports "householding" will eliminate the workarounds that you've created to maintain that data. You can estimate the time saved.
Once completed, these before and after numbers will help you quantify the anticipated return, as well as guide the implementation. That's because the forecast is a set (or subset) of your goals.
Other things might impact revenue as well, such as improved marketing, so we're only tracking anticipated revenue associated with this investment.
Finally, don't work in isolation. Talk with peers who have done similar projects. Find out what worked for them and what didn't, and what successes they were able to measure. Much of this forecasting is based on speculation, and your job is to fact-check that speculation and get it closer to reality as much as you can.
As noted above, you should start with metrics that identify your current conditions and can be tracked after implementation. These metrics could be dollars received, hours spent doing tasks, or number of employees dedicated to a process. Checking your work may seem unnecessary, as the dollars have already been spent, but tracking your progress is the best way to improve on calculating ROI on subsequent investments. You can learn a lot, not only about the particular project, but about your organizational effectiveness as a whole.
This is the secret: it's not the return on the dollars spent. It's the improvements in your organizational capacity and efficiency that can be made if you develop a culture that can predict which investments are worthwhile.
Image: Twinsterphoto / Shutterstock
Image: Peter Campbell
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