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It has become crucial for project managers to not only deliver successful projects but also to demonstrate their impact in quantifiable terms. By understanding and leveraging ROI, project managers can enhance decision-making, drive accountability, and secure the resources needed for future endeavors.
This guide will provide you with practical insights and strategies to achieve tangible results. So, let's dive in and discover how leveraging ROI can help project managers make informed decisions and achieve remarkable outcomes that support the business.
What is ROI in Project Management?
The Project Management Institute (PMI) defines Return on Investment (ROI) as a financial metric used to measure the profitability and efficiency of an investment or project. ROI represents the ratio of the net gain or loss generated from an investment relative to the amount of money invested.
How to calculate the ROI of a project
The formula for calculating the potential return of a project is:
ROI = [(Financial Value - Project Cost) / Project Cost] x 100
Let's consider a project that costs $10,000 to implement and is expected to generate a financial value of $15,000. We can calculate the ROI using the given formula:
ROI = [(15,000 - 10,000) / 10,000] x 100 = 50%
This means that for every dollar invested, the project is expected to generate a 50-cent return.
Benefits of calculating ROI
When it comes to managing multiple projects with limited resource availability, making informed decisions about which projects to prioritize becomes crucial. ROI provides a clear and objective measure of the potential returns a project can generate, which then enables PMs and Stakeholders to assess the values and inform strategic decisions.
Let's explore the advantages that arise from using ROI for selection and prioritization.
- It helps you set the perfect project management strategy with your business leaders or Project Management Office (PMO).
- It puts a price tag on project value. ROI turns subjective “stuff” into hard numbers. It shows business leaders the actual dollar worth of a project turning uncertainty into value-added data.
- You can prioritize project features like a pro, knowing which ones will give you the best bang for your buck.
- Calculating ROI makes you dig deep and discover unexpected benefits. It helps you look beyond the surface-level benefits and identify additional advantages that can significantly contribute to the success and value of your project.
- By comparing actual ROI with expected ROI, a project manager can monitor the project's financial performance against the projected ROI, identify deviations, and take corrective action.
- Allocating resources becomes smoother and more data-based. This results in fewer resource shortages or wastage.
- It helps set priorities. Once you decide to launch a project, ROI comes to the rescue again. It helps you rank your projects and decide which ones get the VIP treatment. The higher the ROI, the higher the ranking, and the quicker you'll get those resources.
- It impresses stakeholders. They want to know what's in it for them, and ROI gives them the answer. When you tie a value like revenue or brand awareness to your project, it becomes way easier for them to make the go or no-go decision.
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Three types of ROI and what they mean for your project
Once the values are input into the ROI formula, it becomes vital for the project manager to interpret the outcome accurately to make informed decisions about the project's success and profitability.
Negative ROI
In the event that the ROI value is less than one, indicating a negative value, it signifies that the project does not generate any profit or financial gain.
If your project's ROI turns out to be a negative ROI, it doesn't mean you should panic and throw in the towel. Sometimes, taking a calculated risk and accepting a temporary loss is worth it if it helps you achieve a bigger goal.
You can level with the financial wizards and other company leaders to figure out what level of risk is acceptable. They'll help you understand how to make sense of the ROI results in your specific context.
Here are some ways to adjust or fix a negative ROI:
- Adjust resources: Consider choosing resources that have a lower cost rate to allow for more profit.
- Reduce costs: Look for ways to decrease expenses without compromising quality or the objectives like negotiating contracts with vendors or streamlining processes.
- Revisit the scope: Assess the project’s scope and objectives eliminating unnecessary features or components.
Positive ROI
When the ROI value is greater than one, representing a positive value, it indicates a profit or gain from the project.
A positive ROI indicates that your project is generating profits and delivering value to your organization. But your job does not stop here. You need to continuously monitor the project’s strengths contributing to the positive ROI, leverage them, and use them to your advantage.
Here are some ways to keep your projects positive:
- Robust planning and risk management: Identify potential risks and develop risk mitigation plans to minimize their impact on the project.
- Stakeholder communication: Continuously engage with project stakeholders through project updates, progress and milestones, seek feedback and address concerns promptly. This helps to keep everyone aligned and expectations closely managed which will positively enhance performance.
- Lessons learned: Conduct project review and retrospective sessions with both the internal and client teams at key milestones and the project end. This helps identify areas of improvement along the way or to implement into future projects so the positive value successes continue.
Zero ROI
If the ROI calculation yields a value of zero, it implies neither loss nor gain.
Organizations may still want to invest in a project that breaks even.
They might want to build their portfolio or establish a relationship with the client that will bring future opportunities.
Prioritize projects with the best ROI
In today's fast-paced and competitive business landscape, it's not enough to simply deliver projects. We need to prove our worth, show the money, and secure the resources we need for future triumphs.
Project planning tools like Float help you assess the benefits of the projects before it even starts.
You can set up a resource as tentative to a project, add the allotted budget per person and enter the cost rate for each of them. This gives you a full visual of how many projects you have in progress, about to start and in your future forecasted pipeline. By calculating ROI on past, present and future projects, you can make informed decisions about projects to pursue.
