Investing wisely for the future: calculating the return on investment can be useful in supporting the development and implementation of an effective records management program.

• Author: Andolsen, Alan A.

At the Core

This article

* examines the return on investment (ROI) for RIH programs

* discusses ROI methodologies and requirements

* explores the elements of building an effective ROI case for RIM

Senior executives increasingly have realized that records and information management (RIM) is an integral part of an organization's business plan, especially in managing an organization's electronic records. This realization carries with it an obligation to determine the return that investing in an effective RIM program brings. However, calculating the return on investment (ROI) for records management efforts is sometimes problematic and can never be a simple financial formula. Many important elements in an effective records management program (e.g., risk management, disaster avoidance, and compliance) do not and may never produce financial gains. Thus, the use of ROI calculations to justify RIM operations must be carefully defined and focused to reflect actual results.

Methodologies

Developed in 1991 at E.I. du Pont de Nemours and Co., the classic return on investment model is the ratio or percentage calculated by dividing total assets into net income (see Table 1 below). It served as a tool to define the overall financial effectiveness of the organization's efforts and provided a means of comparison among companies.

ROI calculations quickly became a tool for gauging the effectiveness of individual projects or investments within an organization's activities. Calculated again as a ratio, this adapted ROI divides the total costs of an investment into the net gains produced by the investment (see Table 2 below). The net gains, of course, are calculated by subtracting the total gains by the investment costs. In this model, the result of the calculation must be greater than 1 to justify the investment. The greater the ROI is above 1, the more financial sense the investment makes.

A variety of ROI calculations have emerged to apply this tool to specific situations, including:

* Return on invested capital

* Return on total assets

* Return on equity

* Return on net worth

As a result, it is important to understand the specific definition of terms in an ROI calculation before comparisons are made about the financial returns of different projects. ROI calculations are most accurate when the gains, costs, and time frame of an investment are well-defined and easily tracked. When factors external to the actual investment costs and gains must be added to the formula (such as allocated or indirect costs), the resulting ROI may not accurately reflect the actual effect of the investment and may even render invalid the decision-making process.

An extremely important element in any ROI calculation is the time flame. The same investment may produce radically different results or ROI if the time frame is shortened or lengthened. An additional consideration related to the time frame is whether to calculate the financial impact in a straight line manner or to use net-present-value calculations.

RIM Requirements

While some elements in a records management program do not result in the types of gains calculated in classic ROI formulas, ROI calculations can, nevertheless, be a useful tool to support the efforts of RIM managers in the development and implementation of an effective records management program. Records managers must also be prepared to use alternative ROI calculations such as the risk of inaction and the risk of incarceration in addition to the traditional ROI calculation. These alternatives attempt to focus on the "preventive" components of records management that reduce risk and assure compliance.

Return on Investment

The classic ROI model serves the records manager well as a tool to justify specific elements of a records management program. For example, an organization moving to new offices is often looking for means to reduce the total floor space required. The records manager can usually demonstrate that the employment of compact mobile shelving will reduce the amount of floor space required for filing within the organization...