The ROI of digitalisation: the formula we use

"What's the return on investment of this project?" It's the question we get most often when an Italian SME is weighing up a digitalisation project. It's also the hardest one to answer honestly.

Not because the ROI of digitalisation doesn't exist. But because it's almost always calculated badly, underestimating the costs and overestimating the benefits. In this article we share the framework we use in our analyses, with concrete examples of where the real numbers hide.

Why the ROI of digitalisation is almost always calculated badly

The typical calculation we see in SMEs is this: software cost + implementation cost, compared with an estimated saving in hours. The problem is that this calculation systematically ignores three items that change everything.

1. The cost of organisational change. The time people spend adopting the new system, the training sessions, the weeks of reduced productivity during the transition. On average, in the projects we run, this cost is worth between 30% and 60% of the software cost.

2. The cost of adapting processes. No software fits existing processes perfectly. There are always configurations, customisations, integrations. Even when handled internally, they have a cost in time and attention.

3. The intangible benefits, which are often the most significant. Less operational stress, faster decisions, better information quality, fewer errors. These benefits are real but hard to quantify, and they're almost always left out of the calculation.

The three-step framework

We don't use a single mathematical formula, because every context is different. Instead we use a three-step framework.

Step 1: measure the cost of the current situation. Before calculating the return on an investment, you need to know how much doing nothing costs: hours of manual coordination, errors that need fixing, delivery delays, reports built by hand every week. Costs that are often invisible because they're spread across time and people.

Step 2: estimate the benefits conservatively. We use 50% of the optimistic estimate for the quantifiable benefits, then add the intangible benefits as a separate item, not monetised but made explicit. This keeps the estimate defensible even in pessimistic scenarios.

Step 3: calculate the payback period, not just the percentage ROI. The payback period, i.e. how many months it takes for the project to pay for itself, is the most useful metric for SMEs. A project with an 8-month payback is almost always approvable. One with a 36-month payback needs far more careful evaluation.

A worked example

A 15-person company was considering introducing a PM tool to manage its internal projects. Total estimated cost (software + implementation + training): 12,000 euros in the first year.

Analysis of the current situation: 6 people were spending on average 4 hours a week on manual coordination. At an average hourly cost of 35 euros, that was about 43,000 euros a year of organisational overhead.

Conservative benefit estimate: a 50% reduction in overhead, equal to about 21,500 euros a year. Payback period: under 7 months. The project was approved without discussion.