There is more to calculating ROI than a simple equation. It can be affected by risk, time, and other factors—including whether your team is agile. Releasing software immediately after coding and testing accelerates feedback cycles, minimizes the cost of delay, and increases return on investment. Allan Kelly tells you how.
Some people love to talk about return on investment; some people hate the idea. Either way, it’s definitely a misunderstood subject.
Let’s start with the basics. Return on investment is often calculated simply:
ROI = Net Return / Investment
That is, the gain of an investment minus the cost of the investment, all divided by the amount invested. For example, if I invest $1 million in a software team and then receive $1.1 million, the net return is $100,000 and ROI is 10 percent.
ROI = ($1,100,000 - $1,000,000) / $1,000,000 = 0.1, or 10%
Well, not exactly.
More to Modeling and Calculating ROI
Other possible uses for the money play a part in the ROI calculation. If the same money could be nice and safe in a bank, earning, say, 5 percent a year, then ROI is really just 5 percent (10 percent minus the 5 percent a bank would pay). Risk plays a role, and the risk-free option provides a baseline.
Financial experts normally “discount” returns against a very safe investment, typically government bonds. So, any investment should represent a return greater than that which simply lending the money to Uncle Sam would make.
To complicate matters, although interest rates are often stated in annual terms, interest payments on savings accounts are usually made monthly. Thus, calculations should be modeled on a month-by-month base.
(To complicate matters further, there are different ways of modeling and calculating the return on investment. I’m sticking with NPV—net present value—here.)
Suppose a company invests $83,333 per month in a software development effort for a year—a total of $1 million. In the final month, the team delivers a product worth $1.1 million. Because some money was spent a whole year before the investment paid off, the calculation changes: The actual return is 7.3 percent, or $73,000 net.
So time can reduce the rate of return. This in itself is an argument for developing software faster and delivering sooner—something I’m sure many developers are aware of.
But this logic also plays into the agile way of working. Consider again that development over twelve months. Imagine instead that the team made monthly releases and deliveries. That is $91,666 each month for twelve months. Now the return jumps to $97,300, or 9.73 percent. If delivery moves to weekly releases, the return sneaks up a bit further.