How to Calculate ROI on Equipment Purchases

aNewDomain.net—Every business buys equipment. Some companies invest more on technology than others. Few businesses, though, truly understand the impact of their purchases, tech or otherwise. As a technology consultant, I find it’s challenging for most organizations to think beyond the initial expense of a product. Understanding the long term costs and impact of purchases on the business, sometimes called the Return on Investment (ROI), is important. It affects your bottom line.

ROI has a number of factors, including the initial cost, costs while in use, end-of-life cost, and how the equipment impacts your revenue. By the end of this article you’ll have a better understanding of how to calculate the ROI in your decisions and make your organization more profitable. For simplicity, the term “equipment” that I use throughout can be applied equally to any technology purchase—a piece of hardware, software or even cloud service.

Initial Cost

The easiest way to determine the initial cost of equipment is by starting with the purchase price. This is the amount you pay to own equipment. It’s the one cost that all organizations focus on as it is the most concrete. However, it’s rarely the majority of the entire cost.

Image credits: Jeremy Lesniak for aNewDomain.net

If the equipment requires staff training or education to be put to use, you need to figure that out up front. For example, implementing new operating systems always requires extra tech support or education. It may seem less expensive to let staff learn through trial by fire, but it’s not always recommended.

Most new equipment requires other compatible components or systems, and that usually adds up in cost. If your new copier needs to be added to the network and you don’t have someone on staff to do that, you’ll need to calculate the cost. For an accurate view of the initial cost of the equipment, the Integrating costs need to be factored in. Accounting note: It doesn’t matter which line item you allocate this cost to as long as it’s accounted for.

Lastly, most of your equipment purchases will replace another piece of equipment. Unless you’re holding on to the old equipment as a spare, you’ll be getting rid of it. This may be a negative cost if the device has some value for resale. Whether it’s a negative due to resale or a positive as a result of disposing it, this cost often sneaks up on organizations. Check if there are costs for removing the old piece as sometimes installing the new equipment doesn’t cover removing the old one.

On-going Cost

On-going costs are where I see most organizations often ignore. We know from experience that buying less expensive items initially usually means spending more later. How do you quantify that? Putting a dollar value on these costs can be difficult and it varies wildly depending on the type of equipment.

Support costs are defined as the time needed to upgrade the equipment back to functionality when it fails. These costs can be user issues or replacing damaged components. You can also think of support costs as repair costs.

Maintenance costs are similar to support costs, except they’re easier to quantify up front. Some equipment vendors offer pre-paid maintenance options. These options cover different things, but are certainly worth investigating. They’re almost always expensive, and typically more than an organization feels they’re worth. However expensive they may seem, they do save money in certain situations.

Future integration costs are also something to look out for. Just because you’ve paid the initial set-up cost when the equipment arrives doesn’t mean you’re done with integration. At some point you’ll purchase a new piece of equipment that will need to work with the one you’re deciding on now. How simple or complicated is the integration process with this piece of equipment you haven’t bought yet? Some companies produce great products, but they’re known for being terrible to integrate with equipment from other companies. Be sure to consider the relative challenge of future integration before you purchase anything. The longer you plan to keep the equipment, the more expensive this cost will be.

It’s a lot to think about especially when your equipment affects several departments and is a significant expense. Being aware of what can creep up is key. Next week I’ll have more on what to consider when you retire equipment and how to analyze the benefits of buying, or not.

Based in Vermont, Jeremy Lesniak is managing editor at aNewDomain.net and founder of Vermont Computing, Inc. and whistlekick.com Follow him @jlesniak or email him jeremy@anewdomain.net

Jeremy Lesniak
Based in Vermont, Jeremy Lesniak is managing editor at aNewDomain.net and founder of Vermont Computing, Inc. and whistlekick.com. Email him [email protected]
Jeremy Lesniak
Jeremy Lesniak
Tags: Business,Business Intelligence,Technology