We’ve previously discussed how organizations can improve business processes by regularly running business process analyses (BPA), and also the importance of applying critical thinking in designing (and re-designing) efficient processes.
When done well, the introduction of new, more streamlined procedures can significantly improve resource utilization, which can have a major positive impact on the business’s profitability. In other words, better business processes lead to a better return on investment (ROI).
But calculating the ROI of a business process — and determining whether it was truly beneficial — is preceded by a number of steps.
Quoting our previous insight,
a business is the sum of multiple processes happening simultaneously, non-stop. All of them serve a purpose, helping to achieve the overarching goals of the organization.
As a reminder, a process is a procedure consisting of specific steps, with a defined start and finish, and certain guidelines and instructions supporting each step.
In business operations, each process is aligned with a certain category of work, so there are always multiple different processes for different areas of the organization. For instance, there will be one process to handle payments, another to handle support queries, another for hiring, another for sales, and so on.
Good processes are critical for organizations at scale.
Typically, smaller companies can get away with informal processes, as they have smaller teams and less data to get lost in. But, as an organization expands, its processes can significantly influence the effectiveness and profitability of the business. With good processes, one can literally see tenfold improvements in how much can get done, and how easy it is to get done, especially with technology.
What is essential, not only to have better, clearer processes but also to be able to calculate their ROI, is proper process design and documentation.
Business processes should be well thought-out, with reasoning as to why the process is designed the way it is. Oftentimes, documented processes end up being separate from the day-to-day process that is actually implemented, which obviously has repercussions for performance and profitability.
When it comes to calculating the ROI, having a clear step-by-step process breakdown can be useful. This could look something like this:
Understanding the return on investment (ROI) of business processes can help companies maximize the benefits from the investments they put into better process design or management. ROI may range from actual costs of implementation and precise profit, or it could be long-term cost savings.
ROI is typically measured not from the entire flow of a business process (which could involve multiple departments and areas of work and is therefore hard to measure as one unit)), but rather from how the process is managed. This is also called business process management (BPM).
ROI from BPM can be classified as either direct or indirect return.
Direct return on investment is typically reflected through tangible, quantifiable values, such as material costs and pricing. For example, when introducing novel tools to improve a process, the actual cost of purchasing a new software platform or tech device is considered when calculating direct ROI.
It is easier to observe trends and changes in direct ROI because its values are specific and can be clearly defined, and it can also be leveraged for predicting and planning future changes.
Improvements in direct ROI can help organizations boost process efficiency, maximize resources, mitigate risks, and better define roles and responsibilities.
Indirect return on investment is seen in values or costs that should be evaluated subjectively. It usually leads to longer-term cost savings and improvements rather than immediate results.
Indirect ROI could be measures of time or productivity — for instance, if an organization introduces a new tool and, rather than directly increasing profits, it instead makes a process less time-consuming and more efficient to complete. Another example is implementing employee upskilling, which can add value to the future success of the business.
Focusing on indirect ROI can benefit collaboration across the company and help standardize processes via training initiatives. It is particularly effective when paired with direct ROI strategies.
Before introducing a new business process improvement initiative, it’s important to
ROI calculations don’t need to be performed for every single business process or process improvement initiative in the company. Focus only on those processes that have an impact across multiple departments and affect a large percentage of employees, are linked to the organization’s long-term strategy and goals, or are costly to implement.
The formula for calculating ROI is the same for both direct and indirect returns:
ROI = Net Benefits / Costs x 100
Here, benefits are linked to what is being measured, e.g., productivity, efficiency, output, etc., of an initiative, while net benefits refer to the value of benefits minus project costs.
While it can be challenging to define specific values for indirect ROI, it’s acceptable to use estimations: for instance, the approximate percentage of time spent searching for documentation and how much time has been saved with the introduction of a new tool.
As we mentioned, intelligent design and documentation will make it easier to identify units of measurement for ROI and determine what makes a process successful.
There is no single, all-encompassing definition of what the ROI of good business processes looks like.
Ultimately, it depends on what the organization is seeking to improve and how. Maybe the company is looking to reduce spending on resources while increasing profit; or, more subjectively, to improve employee productivity and time management.
So, in some cases, direct ROI — like a financial investment — can be measured; in others, it will be indirect or less explicit — like time and output from team members. But, regardless of what factor you’re measuring, it’s important to have a well-designed and well-documented process.
Great process design and efficient business process management will naturally lead to improved ROI.