While most organizations have rigorous ‘Return on Investment’ criteria to evaluate any financing decision, no such equivalent exists for dealing with data. The equivalent to an ROI calculation, a ‘Return on Data’ or ROD is not considered.
Return on Data Formula
It’s time to change the cost to value equation of data. Hence we postulate the following Return on Data formula:
Let’s in turn define the elements:
Gain from data
Proceeds obtained from the better usage of data. Values may be grouped into the following categories:
Business impact benefits
- Shorter sales cycles
- Competitive advantage
- Improved revenue per customer
- Increased number of customers
- Employee time savings
- Avoid hiring of additional resources
Technology & other benefits
- IT maintenance cost reduction
- Consulting cost savings
Cost of data
Costs incurred by the required multi-level infrastructure of data. It may be grouped into the following areas:
- cost of operating the data centers, including the hardware, software and manpower costs of doing so
- operational costs including the deployment and upkeep of the data infrastructure, etc.
- costs of investing in data analytics solutions and of operating these including software, hardware, people, external resources, etc.
The ROD metric
The ROD metric is modelled on the classic ROI formula, which is a very popular metric because of its versatility and simplicity.
The subtraction of the gain from data minus the cost of data returns the profit of the investment. This profit is then divided by its cost. The resulting ROD is measured as a percentage. It can easily be compared with returns from other data activities within the firm, allowing to measure and compare different data initiatives and their respective returns. Essentially a ROD examination is an easy way to gage the potential of a data analytics investment.
Suppose for example a company is investing $50’000 into its data analytics initiative providing the sales team actionable customer insights. In return the company gets within the first twelve months 12 additional deals of $20’000 each with net contributing margins of $5’000 each. The return on data on this investment would be the profit (12*$5’000 – $50’000 = $10’000) divided by the investment cost ($50’000) for a ROD of $10’000/$50’000 equals 0.2 or in percentage terms 20%.
Together with our partner Holistic3 we have calculated a number of business cases and have seen absolutely amazing RODs of 20% up to 50%. The key to these amazing returns is, that often these organizations made little or no use of the data in question prior applying our solution. Once in place the companies started to manage their data assets just like any other asset class within the company. We will share over the next weeks some of these business case results.