Making Big Changes (CAD Manager Column)30 Apr, 2007 By: Robert Green
Putting ROI into action.
For the past two months' installments of "CAD Manager," I've talked about building a workplace action plan to guide your CAD management endeavors and how to put that plan into action. Along the way, I've stressed the action part of the action plan because until you actually accomplish something, nobody will take your plan seriously. At some point, however, your action plan will have to include bigger tasks, such as replacing hardware or purchasing and implementing new design software. These big-ticket items simply can't be undertaken on a whim, because they require large expenditures of money and effort.
To get these big-ticket action items moving along, you'll have to convince your management and users that the change is financially worthwhile and will provide a better way to work. The good news is that you can accomplish all of these objectives by using ROI (return on investment) metrics to quantify, justify and sell the concept to everyone within your company. In this month's "CAD Manager," I'll give you some targeted ROI examples that you can use to justify costly action plan items.
What Is ROI?
First, I need to address the basic concept of ROI and why it is a persuasive tool in your CAD management arsenal. ROI is exactly what the name implies: a way to prove the profitability of a given investment. As an investment becomes larger, your management will care about the return it can generate and how long it will take for the investment to pay for itself.
In almost any CAD management scenario, a return on investment is generated is through time/labor savings. After all, if you're not saving user time by implementing new technology, what's the point? Therefore, anything on which you spend money should generate a labor-saving amount that justifies the spending. Furthermore, because the kind of technology with which CAD managers typically work lasts only a few years (think hardware and software), the ROI timeframe must be three years or less.
To make the ROI argument work, you need a thorough understanding of the terms and concepts used to compute ROI and payback values. The "ROI Glossary" sidebar will help you learn this information. Pay particular attention to the concept of different ROI values in different years and how an investment reaches its point of payback because these concepts are crucial for CAD managers.
An Illustrative Example
Let's say that switching some of your building-design AutoCAD users over to Revit has been on your company's action item list for a while, but you've never been able to get the funding approved to make the move. If you've ever experienced this type of scenario, chances are that you have never really quantified the savings that the new software would produce, and then analyzed the savings against the investment required to gain a good enough ROI to gain management support.
To go through this example, let's use the following financial data: To convert an AutoCAD user to Revit, you'll need to spend $4,000 in software, machine upgrades, CAD management time and training fees and realize a three-week loss of productivity to get the user up to speed over the course of a six-week implementation period. When the user is trained and up to speed, he or she should be able to realize a 10-hour-per-month saving in time as he or she starts using the energy-calculation and reporting features of Revit. The user earns $50 per hour, for the purposes of labor computations.
Let's walk through some ROI calculations using the numbers I've provided above.
Annual savings. If each Revit user saves an average of 10 hours per month over 12 months at $50 per hour, the annual savings can be computed at $6,000 per user. This annual savings would be the same over time or could potentially increase as new features allow more saving.
Year 1 outlay. This outlay will include the $4,000 cost I referenced above, plus $6,000 in lost productivity (three weeks at $50 per hour) for a total of $10,000.
Recurring outlay. Each year, you will have to pay for a Revit software subscription ($700) and some upgrade training ($300), along with a day of lost time required to go through the upgrade training ($400 at the $50 per hour rate). This recurring outlay totals $1,400 per year.
Year 1 ROI. In the first year, $6,000 in savings is divided by $10,000 in costs to achieve a 60% ROI.
Year 2 ROI. In the second year, $6,000 in savings is divided by $1,400 in costs to achieve a 429% ROI.
Year 3 ROI. In the third year, $6,000 in savings is divided by $1,400 in recurring costs and $2,000 for a new computer to achieve a 176% ROI.
Aggregate ROI. After three years, the average ROI is computed by dividing $18,000 in savings by $14,800 in total costs—for an aggregate 122% ROI.
Payback period. A little computation reveals that the Revit implementation has paid for itself after two years because $11,400 has been spent to achieve $12,000 in savings.
By examining this example and extending its logic, I can make some additional recommendations for day-to-day CAD management tasks:
- 1. Year 1 outlays are the killer. Substantial cost is associated with new technology that won't be recovered until the next year. Your management sees this expense as losing money for two years!
- 2. Training costs really hit in Year 1. A very large cost in Year 1 is due to user training and ramping up to full productivity. Perhaps this expense explains why management prefers to hire people who already know the software instead of training existing staff.
- 3. Software takes years to pay off. Because adopting new software costs a lot and requires time-consuming training, the payback period is measured in years, not months. The sample ROI computation perfectly illustrates why expensive design software has been adopted slowly rather than taking the market by storm.
When you think about a software implementation example from an ROI perspective, you will begin to understand how senior management thinks because you will be focusing on financial results, as opposed to flashy new technology.
Making Your Case
Now that you know how to quantify how well an investment performs, you should go back to your action plan and analyze the more complex/expensive items using ROI metrics. It takes effort to collect the savings and cost data of each item, but doing so gives you the ammunition you need to advance the issue into action.
Because you'll now focus on high ROI action items, your management will love your new focus on financial results. And because high ROI values are generated only by saving users' time, your users typically love high ROI items as well. By viewing everything from an ROI perspective, you'll make your management and your users happy at the same time. When you can do that, you've achieved true CAD management success.
Robert Green performs CAD programming and consulting throughout the United States and Canada. Reach him at email@example.com.