ROI (return on investment) is a financial indicator that indicates the profitability (or loss ratio) of investments in a business, project, startup, or marketing campaign. The return on investment is essential for investors who finance various business projects. The ability to track ROI improves business performance hundredfold, analyzes sales performance, and teaches how to allocate budget funds properly.
How To Calculate The Return On Investment Ratio
ROI shows the real profitability of a business solution, therefore it is usually expressed as a percentage. If the value exceeds 100%, then the case’s profitability is proven, and if it is less than this value, then the invested funds are not returned.
The following indicators are used to calculate ROI:
- The cost of a product or service, consisting of all production costs: purchase of materials, logistics costs and salaries.
- Total income without deducting cost.
- Income representing the final profit after the sale of a specific product or service.
- The amount of investment, consisting of all cost items allocated to a specific business. Investments can be assets, capital, the amount of the company’s main debt, and other investments.
It is customary to calculate the Return On Investment analysis every month to conclude the profitability of the invested project based on the data obtained, understand which goods or services have the highest marginality, redistribute the budget, and increase the return investment.
Factors Affecting The Value Of Investment Profit
1. Investment horizon (the longer the investment period, the higher the potential income). This statement works when everything goes according to a pre-developed strategy, without significant deviations from it.
2. The minimum rate of return on capital (average level of return on equity and average interest rate of banks).
3. Inflation rate (the higher inflation in the reporting period, the lower the investment profit will be). Therefore, when calculating the amount of projected income, its investment risks must be taken into account (the most significant factor in terms of its impact on profit from investments). There are risks of loss of income which are difficult to predict or unpredictable at all. Taking risks, an investor has the right to count on a risk premium, which can be calculated by comparing the value of the projected profit and systematic risk level.
4. Liquidity of funds (the speed of circulation of the investment object in cash, as well as the number of losses in such circulation). The less time and the amount of costs for conversion, the better.
Outsourcing Services And Efficiency
Based on outsourcing services growth most companies that consider outsourcing try to find the best way to run their development departments and businesses in general.
I’ve heard so many different opinions and concerns from the customers when starting the journey called “Project development” with them. It doesn’t matter whether we are talking about building a project from scratch or the software process improvement.
Different approaches, different stages but still the same concerns and questions like:
Will they deliver on time and on a budget if I hand the project to them?
What would be the ROI of hiring an on-site team VS getting an outsourcing partner?
Will I get the ROI and revenue growth at all?
Seems like the advantages of outsourcing are obvious whatever it comes to – IT, business processes or accounting. They have been covered many times and are mostly related to cost-effectiveness, fast implementation and domain knowledge. But it will never pay off if you face poor quality service, lack of expertise or no process inside the outsourcing company. The main point here is not about outsourcing in general, it is about the wrong choice of a vendor and your approach to decision making.
There are common questions the customers have when they find themselves on a path of a hard choice. Trying to sort all that out I’ve come to some conclusions:
- We cannot apply the same approach to different projects to evaluate possible ROI.
- Each project needs to be evaluated based on what we already have and what we want to gain.
- Think twice and double-check if the project will be competitive and required by the market.
I am not talking about all the outsourcing companies, I can judge only based on our experience and the way we build the work. But basically that’s what I usually address when talking to clients.
How Will An Outsourcing Company Approach Project Implementation To Ensure High ROI, Especially If We Don’t Have The Capacity To Do It Ourselves?
Well, we won’t do the ROI analyses and calculation as it is simply because it is not our area of expertise, but we will do the following to help you understand how you should approach the project implementation.
What Would It Take For You To Do The Same Stuff On-site?
Depending on the resources and expertise in place the time needed for ROI study and its cost would drastically vary. A benefit-cost ratio should be found. It is absolutely individual for each project depending on the initial data.
What are the risks of your doing it on-site?
- The cost goes up due to the lack of relevant expertise in a specific domain or niche.
- Timeline grows due to inaccurate estimate.
- Not taking into account all the variables that have a significant impact on time, budget and accuracy of the feasibility study.
- Investing too much money as a result of inaccurate initial analyses stage.
- The project is not paying off as expected in terms of time, cost and efforts spent.
What questions to ask in order to choose the right vendor?
- How are the project requirements/specifications collected and documented?
- What is the flow of starting the project development?
- How is the development managed?
- What is the delivery flow? Sprints planning, progress reporting, live video demos?
- How are deploy and delivery organized?
- What tools are used for making the development process transparent and clear for the product owner?
- What team is on board? What is the capacity of the team (Business Analyst, Designer, Front End, Back End, DevOps)?
- What’s the experience in similar projects implementation? What is the capacity of an R&D team?
- Do you have successful samples of the projects with high ROI?
Having received the answers to these questions, you will be able to assess how effective cooperation with your chosen to outsource team will be.
Since outsourcing services are extremely sought after today, there are no specific methods that could determine outsourcing’s effectiveness at the moment. Most often, the system’s effectiveness and how it improves labor productivity is assessed. However, several approaches have been formed to determine outsourcing labor’s effectiveness in international practice. The application of each method depends on the available resources and time of the organization. An important issue here is the difficulty of defining similar functions in IT and other similar organizations.
The most common assessment methodology is ROI (return on investment), as it is more visual and simpler.
By evaluating and analyzing ROI, potential investors can conclude the investment project’s effectiveness/asset that interested them. Business owners can find sources for further development, modernization and expansion by analyzing the profit indicator.
In this case, it is crucial to understand the final cost of project development. Outsourced developers should be highly qualified, seasoned specialists with a portfolio, have in-depth knowledge in project development, be able to adapt to your business needs and the specific project requirements in no time.
Technorely works in a friendly close-knit environment and strives to satisfy all clients’ needs. We are reliable outsourcing IT partner ready to start cooperation in the following fields:
- Fintech industry;
- Healthcare industry;
- Blockchain industry;
- Industrial software.
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