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Investment Evaluation

There is so much going on when thinking about making an investment. The first question is always about ROI. Managers always to have some sort of justification for the things they are spending their budget on. But not all costs are human capital related. There are also some costs, that seem high on the surface. When you start thinking about them, they actually are cheap.

To make it more clear, let me give you an example. Lets say, you have 50 engineers in your department and the average salary is 60K currency, which means your human capital cost is 300K gross, when you multiply this with cost to the company (taxes etc. in general multiplied by 1.7), you end up somewhere around 500K gross annually. One of your engineers say there is this new tool that costs 300 per user / currency. 50 x 300 = 15K Currency. Now, the question to ask is: is it going to worth it?

15K, no matter in which country you are in, is high for a tool to invest in. But let’s scrape the surface. Let’s say your engineers say this tool helps them to increase their productivity by 5%. Wow, not so fancy, right? Only 5%? So basically 24 minutes per day and that is in the best case. Let’s add all the numbers together. We are talking about one full year. If you consider a full calendar year to be 200 working days, for a department of 50, you are saving yourself a hefty 4000 working hours. Basically 2 full-time equivalents which would have cost you 120K!

Now, lets say, 5% is way too much and think it more of 2%. If someone says that this tool would only increase their productivity by 2%, most of us will just laugh and reject. But numbers tell another story. With 5% it was 24 minutes. With 2% it is only 10 months you are saving for the whole department. But still, that saves you around 50K. Amazing right!

Lets even be more drastic and play with 1%. This time you are only saving 5 months of time which means 25K. You are still saving around 10K.

Just 1% increase in productivity, still justifies the purchase. In short, what I am trying to say is; some numbers initially look scary. It is about identifying what you can get in return. Once you can figure out what you are actually getting, the rest is basic math.

Unfortunate thing is, those savings are just on paper, I call them opportunity savings. Because when you save time, you can use that time on other things. Yet, showing them to management can be hard. Still, bringing facts to the table can convince even the hardest nay sayer. Maybe they will be against it on the paper, but once they hear the metrics that are there, they will be more positive.

On the other hand, don’t forget that those investments are not just meant to save you time; you are also showing your employees that you are about their well beings and you are listening to their needs. It can be an IDE, it can be an additional server, it can be a new tool. Also, if you can teach this thinking to your teams, they can also present their wishes and desires better and will not be disappointed if anything gets rejected.

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