Back-of-envelope ROI for automation: a formula and a worked example
Most automation projects get approved on a feeling: "it will save a lot of time". A one-page calculation does better, and it takes ten minutes. Below is the formula I would use, a worked example, and the inputs that most often make it wrong. All numbers in the example are illustrative, invented for the arithmetic. They are not a client result. The formula monthly_saving = volume × share_automated…
A one-page calculation can help determine the return on investment (ROI) for automation projects. This involves a four-step formula that considers the volume of items processed monthly, the percentage of items that can be automated accurately, the time saved per item due to automation, and the associated costs.
Firstly, calculate the monthly saving by multiplying the volume of items, the share of items automated, the minutes saved per item divided by 60 (to convert minutes to hours), and the hourly cost. Next, determine the monthly cost, which is the sum of running costs, review costs, and error costs. The review cost considers the time spent by humans on tasks that are still necessary even after automation. The error cost accounts for the cost of fixing any errors generated by the automated system.
After subtracting the monthly cost from the monthly saving, you get the net monthly savings. To calculate the payback period in months, divide the build cost by the net monthly savings.
Several factors can influence the accuracy of these calculations. The volume of items processed might be lower than anticipated, and if the time taken for a process is not accurately measured, the entire saving could be overstated. Ignoring the exception path (tasks that still require human intervention) can also lead to inaccuracies. Moreover, the cost of rework due to errors is often underestimated, as it includes the cost of fixing the wrong automated items.
It's essential to consider the ongoing costs of monitoring and re-tuning the system post-implementation. Additionally, the improvement in productivity or reduction in errors might not translate directly into cost savings if the payroll doesn't change. Therefore, it's crucial to identify whether the primary benefit is in terms of capacity, speed, or fewer errors.
To ensure the robustness of the project, it is recommended to test different scenarios by varying the automation share and error costs. If the project still pays back within your tolerance in these scenarios, it indicates a robust investment. Otherwise, it may be better to reconsider the automation of that particular process.
Written by urgent.news from Dev.to's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
