Calculating Non-traditional Return on Investments
Let’s face it: implementing an enterprise-level infrastructure management system in an organization takes a capital investment in software, hardware, services and personnel. The individuals who ultimately make the decision to invest an organization’s limited resources into technologies and re-engineering existing processes must also calculate and justify the Return on Investment (ROI).
In the financial and business worlds, determining ROI in terms of dollars and cents can be a pretty straightforward thing to qualify and quantify. It is much more difficult when it comes to ROI on an investment in tangible technology and intangible processes. It is especially tricky when these are not used to generate revenue or increase net profits.
Enterprise infrastructure management systems (EIMs) may consist of one or more application solutions for work and resources management, asset management, plan development and GIS mapping of infrastructure. This can make it challenging to calculate a Return on Investment, and it often requires a different approach.
Return on Investment is traditionally defined as a profitability measure of the financial gain or loss generated on a financial investment, relative to the amount of money invested. This is often represented by the following formula:
ROI = (Net Profit / Cost of Investment) X 100
In terms of government investment in management solutions, ROI is often used to evaluate the efficiency of a financial investment.
Engineering, Maintenance Operations and Public Works departments are not in the business of generating financial revenue and profits from their operations. The exception is enterprise fund agencies, which do generate revenue, but their main motivation is not financial profit. For this discussion, we will assume that they fall under the same category as a general fund operation.
Not all ROI is created equal
In traditional ROI calculations, this is often done in monetary units (i.e. US dollars, UK pounds, EU euros, etc.). Without a historical baseline to benchmark the performance of your investment, calculations aren’t as black and white.
Therefore, a new way of looking at ROI for investments in management solution technologies and services (like those provided by VUEWorks®) must be re-imagined and redefined.
Because traditional ROI is often used to evaluate the efficiency of a financial investment, we can start by shifting focus from the ‘financial investment’ portion of the formula to the ‘evaluate the efficiencies’ portion. This is a trend that public infrastructure agencies have been dealing with for the last five decades: doing more with less through efficiency gains in re-engineered processes. Through the use of evolving technologies, many agencies are now able manage data – that in turn helps manage their processes and limited resources in a more results-oriented and efficient manner.
If an agency can start answering questions like the following, they can start to qualify the benefits of their investment, providing a non-traditional form of ROI.
Some of these questions may include:
- Are we doing more work per FTE (full-time equivalent) per day than prior to our investment?
- Are we able to do more work with less, or the same amount of time and resources as before?
- Are we seeing a shift from the amount of reactive work orders versus proactive preventative maintenance work orders we perform?
- Is the number of requests for service we handle on a daily, weekly and monthly basis being brought to closure sooner?
- Are we able to provide the right information in a timely manner from the new system than we were able to prior?
- Are we touching, inspecting and maintaining more individual assets more frequently with the new system? Are we able to replace more critical traffic signs per year because of better data provided by the new system?
- Is the system helping the agency comply with a mandatory regulation or reporting requirement?
A positive response to these and other similar questions is a clear indication that you are experiencing a positive Return On Investment. The difficult challenge then becomes converting efficiency gains into a monetary value.
Non-traditional forms of Return on Investment
While monetary value is the traditional measure of ROI, there are a number of alternate ways this can be quantified:
- Time savings
- Better data for decision making and reporting
- Migrating from reactive to proactive work, resource and asset management
- Increased level of service
- Timely regulatory compliance
- Monetary savings realized through decision support tools
Because public agencies are asked to do more with fewer resources, it is important to simplify and measure variables. Operational resources used to design, build, manage and maintain infrastructure through its life-cycle can be broken down into two basic components: financial capital and human capital. Financial capital relates to the available funding and the products and services that funds can buy. Human capital relates to employees and the total (and finite) time they have individually and collectively to spend maintaining your infrastructure networks.
Time savings are easy to understand, easy to qualify and, in many instances, easy to quantify. As the old saying goes, “time is money”. Most non-traditional forms of ROI can ultimately by broken down to some form of time savings. And time can then be converted to a monetary value to help gauge your ROI.
If a new database system within a DOT allows me to produce an updated report with the press of a button, when in the past it took one person from each DOT District an hour a week to develop their portion of the report, an ROI can be calculated. If you have five (5) DOT districts and the average FTE creating the report costs $50/hour in wages and benefits, we can calculate the amount of time the new system saved and convert that into a monetary cost savings.
5 districts X 1 hour a week X 52 weeks = a time savings of 260 hours over a year. Multiply the 260 hours saved by the average FTE cost of $50/hour and you have an ROI on the system for the creation of just one report of $13,000 annually. If 50 statewide reports are produced weekly, the time savings is similar to the first report, and now there is an estimated annual ROI of $650,000 for just those 50 weekly reports.
Because most agencies do not have enough historical information to benchmark these calculations against, especially non-financial benchmarks, sometimes estimates need to be developed or assumed based on experience, gut feel or empirical evidence. For example, prior to having a new management system, you may not have tracked how many catch basins and culverts were cleaned annually (reactively and/or proactively) by all crews, and which ones you touched annually more than once. With the new system you may now have the data to know how many activities are occurring since the new system was implemented. In this case, you may have to go back and make some gut-feel estimates to qualify past efforts before you can quantify them in terms of time savings or ROI.
Better data – Not only does better and readily available data equate to a time ROI, but it can also equate to other types of benefits and efficiencies. For example, with the implementation of a management system like VUEWorks, you may start keeping an up-to-date traffic sign inventory. As part of that inventory, you may start tracking current conditions for all your traffic signs and using that data within VUEWorks to prioritize your annual sign replacement program. Through this more methodical approach, you may be able to evaluate your sign inventory and current conditions against traffic accident data to see where your needs for better signage may help reduce the number of accidents. This information may be two-fold: increasing public safety and reducing the amount of property damage caused by accidents. Through this approach, your investment in VUEWorks has provided the ability to identify and replace more signs when they need replacing in a proactive manner, which may in turn reduce the number of traffic accidents, saving both citizens and the public money through the reduction of traffic accidents. This all plays into ROI.
Migrating from reactive to proactive – It is well known that reactive maintenance takes more time, costs more money and sidetracks you from maintaining public infrastructure in a state of good repair (SGR). It has been well documented that it is cheaper to maintain an asset before you have problems than to react after a problem arises. It doesn’t make sense to replace an asset too soon, while it still has useful life and value left. It is equally inefficient to wait until an asset has failed, potentially creating issues with safety and level of service related to the infrastructure network. This often costs more to repair or replace than it would cost to maintain. Proactive asset management allows a reduction of the number of reactive incidents dealt with annually, thereby reducing the cost to maintain those assets in a state of good repair without impacting public safety or level of service (which has its own cost).
Increased levels of service – Driven by the human capital aspects of an operation, this can be one of the more challenging forms to quantify. If a sewer crew can increase the number of sanitary sewer lines it cleans annually and can use a maintenance management system to help identify those areas of the network that need to be cleaned more or less frequently, an agency can coordinate their efforts by understanding and aligning their big-picture needs with limited resources. This results in maintaining the right assets at the right time – before there is a problem in service. This in turn provides an overall increased level of service and can have a significant ROI in the areas of economic (not to be confused with financial), social and political ROIs.
Cleaning a sanitary sewer line in a commercial restaurant district more frequently may reduce the number of sewer blockages and/or sanitary sewer overflows (SSO) that cost businesses money and potentially lost revenue. Lost revenue has a negative impact on local sales tax dollars received by the local agency. Increased levels of service by ensuring that infrastructure networks are maintained in a state of good repair can provide a community an economic ROI.
Timely regulatory compliance – This includes (and is the result of) the prior four non-traditional forms of ROI. Additional benefits to timely compliance with regulations can be gained in a variety of ways. First, being in compliance with a federal or state regulation or mandate can help an agency avoid a financial penalty in certain cases. This is especially true when dealing with environmental regulations, where the US Environmental Protection Agency has the ability to assess and levy fines against a public agency if found out of compliance. It may also be determined that an agency isn’t doing enough to mitigate a particular reoccurring issue, such as sanitary sewer overflows (SSO). Timely regulatory compliance in the area of reporting accurate and complete data from an infrastructure management solution like VUEWorks can also help a local or state agency capture a larger portion of federal funding. State DOTs that have an accurate and up-to-date system that can generate on-demand HPMS reports for FHWA tend to find it easier to increase federal funding for roadway and bridge projects, since they can qualify and quantify the needs through accurate data.
Monetary savings realized through decision support tools – The concept and tools used for decision support were developed over the last 50 years by the U.S. Army Corps of Engineers and a group of private sector engineering and technology firms.
Decision support tools, like VUEWorks’ Budget Forecasting module, allow an agency to model Capital Improvement Plans and Work Plans based on available budgets, potential activities and current conditions of an infrastructure. Users can target budget and asset condition levels as part of their model analysis.
Here, Performance Curves for like-performing assets are created in the management solution. Current asset inventories with age and condition ratings are then analyzed against an activity matrix (or a decision tree) to determine which assets should have which activities performed against them based on some decision support logic and where the asset falls on the Predictive Performance Curve.
The ability to prioritize which assets should receive attention and funding in the plan development process can help ensure that an organization is not spending limited funding on a low priority, low usage asset at the expense of a high priority asset that may have high usage or that carries a heavier risk if it fails (e.g. loss of sales tax revenue). This is the concept of Performance-based Risk Asset Management.
These predictive analysis tools allow you to create multiple plan scenarios so you can optimize your plans to get the right mix of budget dollars and conditional impacts on the infrastructure. This allows agencies to evaluate where they get the biggest bang for their investments. For example, if the total capital improvement budget is applied to fixing the worst road segments strictly on a worst-first basis, it may only increase the overall network condition rating by a few points. But if condition levels at or above a certain minimum level can simply be maintained, the lifespan of more assets can be extended, which saves money. This is especially apparent when performing a surface seal (preventative maintenance) versus totally reconstructing that same stretch of road.
Add to that the ability to prioritize assets based on other factors such as public safety or economic impact and you now have a powerful tool that can help you model out an even greater ROI. This applies to both the investment in the management solution as well as on the decisions you make.
For example, if we look at the pavement performance curve below, we can see that each tier of activities, from “Do Nothing” through “Reconstruction”, becomes increasingly more expensive per square yard as the maintenance for that asset is deferred. Let’s say the curve is used to consider the potential life-cycle cost of a newly constructed road segment with a 50-year useful design life. If nothing is done to the asset over the next 50 years, total reconstruction of the road segment is estimated to cost an average of $72/sq. yd. Under this scenario the road segment will have spent approximately 32 years of its 50-year design life below a Pavement Condition Index (PCI) of 70 (the industry standard for an acceptable condition that is still in a state of good repair). If, however, the goal is to maintain road segments at or above the minimum desired PCI condition level of 70 (to be compliant with SGR) four Preventative Maintenance activities can be performed over that 50-year life-cycle at a cost of $6/sq. yd. per event. ($24/sq. yd. over the life of the segment).
If the road segment is 200 feet long and 24 feet wide, or 533.33 square yards, the difference in cost of ownership for this one road segment based on the two approaches is $25,599.84. ((533.33 sq. yd. X $72/sq. yd.) – (533.33 sq. yd. X $24/sq. yd.) = $25,599.84). Now imagine if you had 200 miles of 24-foot pavement segments. Assuming everything else is equal for this example, you can see the difference in cost of ownership between the two methods now becomes $135,167,155.20 over the 50 years. (5,280 segments x $25,599.84 per segment). Now you are talking about real efficiency gains as well as a real financial Return on Investment. This is the power of automated decision support tools like VUEWorks Budget Forecasting.
An example of a Performance Curve for pavement.
As you can see, ROI is much more than a traditional financial return on your investment when speaking about software technologies. It encompasses gains in efficiencies and effectiveness of your operations. It increases the quality and condition of your infrastructure and your levels of service. And it impacts citizen perception. These are all worthy Returns on Investment!
Want to know more about calculating your ROI? Contact John Pregler: email@example.com