How to Assess the ROI of IT Consulting Services
Being able to effectively leverage technology can put businesses at a competitive advantage. However, modern businesses face significant challenges that hinder growth. From keeping up with rapid technological advancements to addressing the talent and skills gap, how can you ensure that your decisions align with your broader business objectives?
IT consulting services can help companies tackle unique challenges and bridge the gap between their existing capabilities and business goals. Some key scenarios where businesses can benefit the most from working with IT consultants include:
- Developing a technology strategy that aligns with your business goals
- Managing complex or large-scale projects
- Undergoing significant digital transformation
While IT outsourcing services offer significant benefits, how do you know if they’re worth it? Conducting a cost-benefit analysis (CBA) can help you assess the ROI.
This type of analysis is best for when you must make decisions that will significantly impact your organization, such as when you’re allocating resources, deciding on where to invest, or crafting new business strategies.
In this article, we’ll examine how you can perform a CBA to make better choices for your organization’s growth.
Building a Framework to Effectively Measure ROI
Working with an IT consultant entails a significant investment for organizations. You know the value they bring, but how do you justify the expense? How do you demonstrate that tangible ROI?
It’s worth noting that it can take some time before you see quantifiable results from working with IT consultants. To help you identify the specific value that strategic consulting brings, whether it’s enhancing operational efficiency or speeding up project timelines, creating a CBA framework helps.
Here’s what you need to do to make a comprehensive framework for measuring ROI:
Define the Scope of the Analysis
Establish specific and measurable goals, such as reducing operational costs, increasing sales via digital channels, and improving customer satisfaction. The metrics you use to measure the ROI of IT consulting services will depend on your goals and objectives. Examples of common ROI metrics include cost savings and increased revenue.
Know Your Baselines
Before you bring in a consultant, gather data on critical focus areas like financial performance, operational efficiency, and customer satisfaction scores. Reviewing your historical data is a good place to start.
Monitor Your Progress
Implement measures like scheduled meetings and progress reports to monitor the project implementation and impact of the consultant’s recommendations.
Quantify the Benefits
Provide conservative estimates of the financial benefits gained from the consultant’s services.
Calculate the ROI of IT Consulting Services
This involves comparing the total financial benefits you’ve gained against your investment (hiring an IT consultant). You can use this formula:
(Financial Benefits – Investment) / Cost of the Engagement or Investment x 100
Common Pitfalls to Avoid
Calculating the ROI of IT consultants is a big challenge. Knowing the mistakes to avoid not only helps you gain valuable insights but also helps you maximize your engagement with these experts.
- Not having clearly defined objectives. Not defining clear and measurable objectives for strategic consulting engagements can derail your project. It also makes it difficult to accurately evaluate the ROI of IT consultants and whether or not their solutions have helped your organization.
- Inaccurate project costs. Having accurate estimates allows you to make better investment decisions. When calculating ROI, make sure to account for all associated expenses, including the consultant’s fees, hidden costs, and ongoing support costs.
- Not accounting for potential setbacks. Every project comes with certain risks like delays and changes in the project scope. To ensure accuracy in your ROI calculations, conduct a risk analysis and adjust your calculations.
- Not tracking ROI properly. And over time. Doing so ensures that your consulting projects, such as if you’re planning to undertake custom software development, are sustainable. Refer to your baseline and make it more comprehensive by incorporating relevant KPIs. Schedule regular project assessments to ensure that you’re maximizing your investments.
- Only focusing on tangible benefits. Tangible benefits like increased revenue and enhanced cost savings are great for any organization. However, intangible benefits like improved decision-making and enhanced employee satisfaction paint a more complete picture of the consulting engagement’s impact on your organization.
Aside from these common pitfalls, you also have to factor in the challenges that come with measuring ROI. For instance, how do you quantify the benefits of hiring an IT consultant? Many benefits are intangible. Moreover, attributing these benefits directly to the consultant’s work can prove to be tricky given that other internal or external factors can also affect your organization’s performance.
How Much Do IT Consulting Services Cost?
When you perform a cost-benefit analysis, you have to account for different types of costs associated with a project. When calculating project costs, consider allowances to accommodate unexpected costs or project scope changes.
Direct Costs
These expenses are directly associated with your project and can be traced to specific activities like labor, manufacturing, and materials costs. Say you’re starting a new enterprise mobile application development project. Direct costs could include payment for your in-house development team and the purchase of new development software.
Indirect Costs
While indirectly related to your consulting project, these fixed costs are necessary for its implementation. Examples include rent, utilities, and subscriptions to development software.
Intangible Costs
These cover current and future costs that are difficult to quantify. Examples include the impact of your project on customer satisfaction or a decrease in engagement levels when you roll out a new process or project.
Opportunity Costs
When you prioritize one strategy over another, you’ll lose benefits or opportunities. An example would be when you choose to pursue cross-platform app development over developing an enterprise data management system.
Identifying the Benefits of IT Consulting Services
Benefits, in general, can be categorized into four types:
Tangible
Quantifiable or direct benefits that you can measure in monetary terms using financial metrics. Examples include increased revenue from a new product and cost savings.
Intangible
These are non-monetary benefits that are difficult to quantify. Despite that, these still provide value to your organization. For example, enhanced employee morale, better brand awareness, increased customer satisfaction, and gaining a competitive advantage can be classified as intangible benefits.
Immediate
While it may take a while before you see some results, there are such things as immediate benefits that provide immediate value to your organization. Usually, these are realized shortly after implementing the consultant’s recommendations. Immediate benefits like increased productivity are also easier to identify and quantify.
Long-Term
Examples of long-term benefits include more agile capabilities, enhanced risk management, and greater capacity for strategic planning.
Conducting a Cost-Benefit Analysis: Assessing the ROI of IT Consulting Services
As mentioned earlier, conducting a cost-benefit analysis is ideal when you’re about to undertake a move that can significantly impact your organization.
CBA enables more objective assessments and provides leaders with comprehensive financial context and data-backed justifications to support their decisions. When done well, it makes projects a bit more predictable in terms of the costs involved and the benefits you’ll be receiving.
Build Your CBA Framework
If you haven’t yet established your CBA framework, this is the best time to do it. Refer to the section on how to build a framework to effectively measure ROI. This involves defining the scope of your analysis, identifying the project’s goals and objectives, and selecting relevant metrics to measure and compare projected costs and potential benefits.
Identify Associated Costs and Benefits
Create two separate lists: one for projected costs (associated and indirect) and the other for expected benefits. All costs should be accounted for and must have assigned dollar values. Get your other stakeholders involved during this process. They can provide you with valuable insights and more accurate estimates of costs. For example, your software development team can provide better estimates or they can help you choose the best enterprise software pricing models.
Quantify Benefits
You’ll need to assign dollar values to all benefits. This, along with quantifying all associated project costs, allows you to accurately compare the two categories. For this step, working with other stakeholders or experts can help, especially when you’re trying to quantify intangible benefits. You can also consider using these methods:
- Using financial metrics like ROI and net present value to quantify tangible benefits.
- Using qualitative data from surveys and interviews to assess the impact of intangible benefits and provide estimates of their perceived value.
If you’ve had previous projects where you brought in a consultant, consider incorporating the calculations you used and then adjusting them to align with present rates.
Determine the Net Present Value (NPV)
To determine if IT consulting services are financially feasible and profitable, you need to calculate your decision’s net present value. It measures the net cost-benefit by comparing the value of the expected cash flow that your investment brings versus the current value of cash outflows.
Calculate the Cost-Benefit Ratio
The cost-benefit ratio compares the present value of the estimated costs and benefits of a project or investment.
To calculate the cost-benefit ratio, first figure out the present value. The present value of a project’s benefits and costs is calculated with the following formula:
PV = FV/(1+r)^n
Where FV equals Future Value, r is the rate of return, and n is the number of periods.
Once you have the PV, you can calculate the cost-benefit ratio thus:
Sum of Present Value Benefits / Sum of Present Value Costs
If you get a result that’s less than one, it indicates a negative cost-benefit ratio. Given that associated costs outweigh the benefits, this tells you that the project may not be a good investment.
If you get a result that’s greater than one, that’s a positive ratio, where the benefits outweigh the costs. This indicates that hiring an IT consultant will generate financial benefits.
If you used KPIs to measure costs and benefits, make sure to factor these alongside your cost-benefit ratio. It also helps to compare these KPIs with historical data and predicted values.
Post-Analysis
After crunching the numbers, it’s time to make a decision. Consult with senior leaders and ask for their perspective. If you have multiple options, make sure to conduct a separate CBA for each one and then compare the results.
Do More with IT Outsourcing
Performing a cost-benefit analysis allows you to objectively evaluate the financial investment that comes with outsourcing IT support services like consulting. Note that the accuracy of your analysis will depend on the accuracy of your data. The more accurate your estimates, the more likely it is for you to get better, more precise results.
Working with the right IT consultant is crucial to your organization’s growth. When choosing an IT consulting service, start by assessing your needs. What specific IT requirements does your business have? What challenges are you currently facing? Knowing these helps you find professionals with the right expertise.
Make sure to check their credentials and evaluate critical skills like communication, project management, problem-solving, and collaboration skills. See if the consultant’s values and work style are a good fit for your organization.
IT outsourcing helps businesses rapidly complete IT projects, get tailor-made solutions, and gain full ownership of their projects. Looking to outsource your enterprise software product development to a trusted software development company?
At Taazaa, we leverage our expertise to deliver cutting-edge custom solutions designed to fuel innovation and drive business success. Stay ahead of the curve with our end-to-end software development and enterprise product engineering services. Contact us and discover the Taazaa difference today.
