Calculating the Return on Investment (ROI) of Going Paperless
This topic is brought to you by our friends at Totally Paperless.
Consider for a moment that one four-drawer file cabinet:
- Holds 15K-20K pages of paper
- Costs $25,000 to fill
- Costs $2,000 per year to maintain
How do you justify such a wide scale project in your office? Start by calculating the ROI of a proposal to go paperless or for proposing upgrades to servers, software, hardware, or anything else that has to do with your project. Typically, such a task seems daunting. Perhaps you want to measure the ROI of a change you made, and you’re either lost at how to do it or overwhelmed at the time it will take to track and measure it.
It isn’t always easy to put down and quantify on paper what you know in your head and in your heart: Yes, it will have a positive impact on the bottom line. What happens if you’ve done the homework in the proposal stage, and you become accountable for it? How are you supposed to measure it? How much time should you invest in tracking every financial aspect of something just to say, See? It was a good recommendation.
Some people pick up the gauntlet and proceed to propose a ROI and then attempt to track it while others choose to avoid the whole ROI thing. The reality is that if you expect management (those who hold the purse strings) to continue to invest in significant projects, IT needs to embrace the concept of ROI and learn how to measure it effectively. Let’s start with a simple equation that every first year accounting student would understand.
- How much is it going to cost (initial investment and on-going costs)?
- How much money is it going to make?
- How much money is it going to save in the first year and every year after that?
- From here, figure the ROI. The formula is:
($Earnings + $Savings – $Cost)/$Cost X 100 = ROI %
Calculating the Cost of Paper
According to INC Magazine:
- It costs $20 to file a document,
- Or $120 to search for a misfiled document, and, if you can’t find it
- It costs approximately $250 to recreate a lost document.
Extend this formula into cost justification and ROI for the purchase of a new computer. (Again, we are attempting to keep this simple to get the point across.) The cost of the new, appropriately equipped computer is $1,500. In this example, there is nothing wrong with your old computer; it simply isn’t fast enough. Consequently, as part of the proposed ROI, we need to determine what is to be done with the old computer. In this example, the company sells it to someone for $500. Hence, the net cost of the new computer is $1,000. Now, you need to determine how much faster the new computer is. Yes, those processor speeds are wonderful guides, but we need to be realistic. If you double the processor speed, you don’t double your productivity. Before you start your ROI calculation, stop and think about how often you’ve waited for the computer to finish processing something before you can proceed.
You might even keep a paper log beside you and record each instance, both the frequency and duration, for a period of time, perhaps during end-of-month or whenever your period of high demand is. This evidence-gathering technique will prove very valuable in supporting your analysis. After a few days, check your log and total the time and occurrences. Divide by the number of days you’ve run your log to come up with the daily nuisance factor. Now you know just how much of your time the existing computer is wasting. With this knowledge, you can quickly figure out how much it is costing your employer by taking the number of working days in a year and multiplying it by your hourly wage. For this example, suppose the old computer is costing you an average of two minutes 15 times a day for a total of 30 minutes a day. That is approximately 120 hours a year. If you’re earning $15 hour, that amounts to an annual cost of $1,800 a year. Now, estimate how much time the new computer will save you. Realistically, you’ll never be able to recoup all that time, but let’s assume you can reclaim 50% of it, or $900 in the first year. In your proposal for the new computer, the boss will want to see a positive ROI, but if you only plug in your numbers for the first year, you’ll get a negative ROI of (900 – (1500-500))/(1500-500)*100 = -10.0%.
However, remember that the new computer has a life expectancy of at least 2 to 4 years on your desk, and those savings continue into future years. Therefore, the real ROI in this case needs to cover the second year and so forth. With this in mind, show your boss a two year ROI projection of (900+900 – (1500-500))/(1500-500)*100 = 80.0%. Now, what boss in his right mind won’t approve an expenditure that yields a return of 80% in just two years?
Thus, instead of dealing with emotions and words like, I believe a new computer would help, or I feel like this old machine is slowing me down, you have some cold, hard facts to support your case, and it is easier to accomplish things when the facts back you up! Remember: this is a simple example, but it’s enough to give you a good idea as to how to proceed, and, most importantly, why you need to take these steps. A conservative estimate is that a targeted document management effort can return as much as $20.00- $40.00 for every dollar invested. That’s pretty good by anyone’s standard, and most of us would be happy with even two dollars for every one invested!
The reality is that the ROI can be measured for everything. Practicality dictates that you should only measure what you can effectively measure to the extent that getting a more detailed measurement is going to cost more than the potential savings. When evaluating the cost of paper in your office, be realistic, but measure how paper is used. See what is stored and how the information is retrieved, if it is ever retrieved. Bring co-workers in on the project and measure the time spent looking for missing documents, re-creating documents, and filing documents. Evaluate lost worker time traveling to file rooms, printers, and copiers. Considering the many surveys which have been done on productivity, you should be able to substantiate your investment based on the facts.
Finally, there are several solutions for document management. Your plan should incorporate one or more of these. Often, one method does not solve all your problems. Consequently, you may need to create digital forms (scanning and imaging), but you also will need to manage your records. Today, most businesses find that they have a large percentage of the information already in the computer; they just need to manage the information better in the form in which it exists. Since it is rare for a business to be an island unto itself, you might canvas your vendors and customers to see how they are dealing with the issue of paper. We have found that many businesses are anxious to go digital and would love to place digital orders or purchases and are willing to work with you in finding solutions to save money. This creates long-term vendors and customers — a win-win for everyone!
Information is recorded, stored, and distributed in four physical media types: paper, film, magnetic, and optical. Good data is available for the worldwide production of each storage medium, providing an upper boundary for the potential production of original information and copies. There are often good estimates for how much original content is produced in each of these different storage formats, particularly for the advanced economies that produce the most information.
More Reasons for Paperless
Why is it, then, that if using digital media can reduce cost so drastically while improving productivity, people stay with paper? It could be because paper is
- Our comfort zone,
- Easy to use, and
- Easy for comparing documents.
- Triples processing capacity (Gartner),
- Increases productivity up to 50% (IDC),
- Creates immediate access to decision-critical data (which is the real goal), and
- Reduces storage space cost by up to 80%.
If all this does still does not convince you, there is still the very real issue of compliance with the ever-increasing legislature listed below regarding financial reporting that requires you to keep and to be able to readily access vast amounts of information:
- Regulations #302 & 404,
- DoD 5015.2 (records management standards),
- ISO 15489,
- HIPAA (health insurance),
- Gram Leach, and
- Other SEC Guidelines.