One of the questions managers ask when deciding on an ABC/M implementation is, what is the ROI on an ABC/M Project? In other words:
How much is this going to cost?
Does it fit in with the budget?
When are we going to see the results?
When are we going to recover the monetary and resource investment?
To answer this question, nothing better than quoting the ABC genius himself, Gary Cokins.
Estimating the Return on Investment (ROI) from ABC/M
Some organizations have strict rules to determine the acceptance of proposals to invest and spend money on equipment or projects. Sometimes the administration of these is called the capital investment justification process. Senior management may not authorize any spending unless the business proposal exceeds a certain return on investment (ROI) level – often referred to as the hurdle rate. Management wants to assure itself that any money re-invested in itself will greatly exceed the level of return that its shareholders could achieve in other investments.
Organizations that are skeptical of ABC/M regularly ask, “What is the ROI from ABC/M?” My blunt reply from what I have learned is that calculating ROI on ABC/M is not possible to do. Here is why.
What we are discussing is actually “What is the incremental benefit from having better data to make better decisions?”
My reply to this question about the ROI from ABC/m is somewhat sarcastic, but I am trying to first catch the questioner’s attention in order to make an important point about what ABC/M is and is not. I first answer with this, “The ROI from ABC/M is often 1,000%!”