In the world of an independent tire dealer, calculating return on investment (ROI) is an everyday occurrence.
Before you invest in an alignment machine, you calculate the number of additional alignments you could perform with the machine, estimate reduced comebacks and consider how your bay space can best be used. You do the same with tire changers, inspection tools and other equipment, which can all help to increase your car count, revenue per bay and overall profitability.
So, why don’t more independent tire dealers think about information technology in the same way?
Technology ROI has an admittedly checkered past. When computers first emerged in the tire industry, things were fairly straightforward. Dealers could look at repetitive tasks being performed manually (e.g., hand-written invoices, statements and checks, manual P&L statements) and arrive at some idea of how many hours were saved by using technology. They could even reduce staff or grow without adding staff. Add to that the increased accuracy inherent in automation, and you had a winning formula.
Then came the late 1990s, the so-called “Y2K bug” and the Internet. Many users were forced to spend money to become Y2K compliant, and everyone told them they had to be on the Web. This was a boon for software companies, but it became harder for owners to look at the money they were spending and conduct a solid analysis that showed a true payback for their investment.
Today, most independent tire dealers are automated. Changing software or adding to what they have is a more difficult decision to justify.
So, how do you do it?
It starts with evaluating your business goals. Technology should simply be a means to an end one of many tools that help you achieve the various goals of different players in your organization. Some examples might be:
Owner: improve profitability, more time away from the business, grow business without adding staff, reduce expenses, increase sales volume.
General manager: improve profitability, improve customer retention, improve employee retention, reduce lost sales, increase revenue.
Controller: improve profitability, reduce time spent on financials, prevent missed purchase discounts/bonuses, reduce inventory shrink, reduce past-due accounts receiveable.
Notice that improving profitability is the common goal of all of the players. The other goals are ways each person, in his or her individual position, may affect the final bottom line.
The problem, however, is that software vendors will tell you that they can help in every area. In fact, many of them are perfectly willing to tell you how much they can affect each area without really doing their homework. How many times has a salesperson told you, “My software will increase your sales by X%,” without really knowing the intricacies of your business?
The point is, you need to work with the software company to determine where, and how much, the software can help you. The numbers need to be your own your sales and profitability figures, your inventory figures and your overall knowledge of how your business works today. This will allow you to determine whether there is sufficient ROI to justify the investment.
Remember, also, that it is not just about replacing tasks. A U.S. government study found that return on technology actually occurs in four phases:
Phase 1: Installation and Training Negative ROI
You are spending time and money implementing and learning the technology but not yet deriving any solid benefit.
Phase 2: Task Automation 10% to 20% ROI
This is simply automating tasks you and your staff are already doing, without any change in the business or its processes.
Phase 3: Business Process Change Up to 300% ROI
This includes quicker, more reversible business changes (e.g., integrating a parts and labor catalog, utilizing handheld computers for inventory).
Phase 4: Business Transformation Strategic Unlimited ROI
This encompasses more difficult, long-term business changes (e.g., e-commerce initiatives, expanding retail business).
As you can see, ROI in technology really takes off when you use it to change your business processes. It takes off even more when you use it to help change your overall business model. So, remember, goals and business changes should come before you even think about technology. And, when calculating ROI, you need to allow for the installation and training phase.
Once you get to this point, you can then think about calculating your final ROI. If you can change your business in tactical and/or strategic ways, ask yourself what that would do to your bottom line. How much will the technology allow you to increase sales, reduce expenses and change your overall profitability picture?
Of course, there are still areas in which new technology can automate, or shorten the time to complete, various tasks. In this case, many people will think of ROI simply in terms of hours saved and multiply that by an hourly rate for the person doing the task. To take it to the next level, though, you should also be thinking about the opportunity cost of not implementing the technology. If you free up that person from a repetitive task, what other revenue-generating and/or cost savings areas could they contribute to? This also needs to be part of the equation.
You also need to think about your staff, as well. Is this technology something that will fit the current culture of the company? Or, are you doing this in an attempt to change the culture to perhaps a more forward-thinking, aggressive mindset? If it does not fit the culture, and you don’t want to change the culture, you are much less likely to achieve a reasonable ROI.
Of course, given all of this, there may be times when investing in technology is like fixing a hole in the roof. You simply have to do it. If you are a wholesaler, and every one of your competitors is allowing customers to purchase online, you may have no choice but to do the same.
In the end, calculating ROI for information technology is a smart, forward-thinking way of aligning technology with your business goals, best accomplished through a collaborative effort with your technology provider. A good vendor should have tools that allow you to plug your numbers in and help you determine whether you are just spending money or investing wisely.