The importance of ROI when choosing the best AI tool for your business. A quick glimpse!
The Concept of ROI
Let's start by defining the concept of ROI, which is simply a Return On Investment.
Definiton 1 > A popular profitability metric used to evaluate how well an investment has performed.
Definition 2 > Is a financial metric used to evaluate the profitability and efficiency of an investment.
Definition 3 > With ROI we measure the ratio of the gain (or loss) generated from an investment relative to the cost allocated.
Definition 4 > ROI is a performance measure used to evaluate the profitability of business expenditures.
Definition 5 > ROI looks at the upfront cost of an investment versus the net profit it produced to determine whether it’s profitable or not.
Definition 6 > ROI is a widely-used metric that measures the profitability and efficiency of investments.
ROI is extremely useful for measuring success over time. Executed well, ROI becomes the common denominator for assessing the contributions of various initiatives across the organization.
Furthermore, this metric is popular due to its simplicity and versatility, providing a clear picture of whether an investment generates a net positive or negative return. It can be used to evaluate traditional investments, new technology initiatives, and, increasingly, AI-driven projects.
How to calculate ROI for projects in general
By simply dividing the net profit or gain (generated from the initial investment) by the initial investment cost, and expressing the result as a percentage or ratio.
ROI provides insight into the efficiency and performance of investments, aiding investors and businesses in assesing the potential returns and making.
ROI = (Present Value of Investment - Initial Value of Investment) / Initial Value of Investment
Example of ROI in today's business world
In today's new technology business, for example in Cryptocurrencies, ROI is used by cryptocurrency traders (and investors in general) to measure the performance and the efficacy of a crypto investment, or to compare the performance of mutiple crypto investments in a portfolio. ROI tries to directly measure the amount of return on a particular investment, relative to the investment's cost.
Limitations of ROI
Despite its utility, ROI has limitations, especially in AI projects. It doesn’t account for the holding period or the varying risk levels across projects, which can make comparisons challenging. AI projects also often require a "Total Cost of Ownership" (TCO) perspective to account for development, maintenance, and upgrades over time, not just initial investment costs.
Why is ROI so popular?
Because of its versatility and simplicity.
Esentially, ROI can be used as a rudimentary gauge of an investment's profitbility. Based on the calculation, if an investment's ROI is net positive, it is probaly worthwhile. But if other opportunities with higher ROIs are available, these signals can help investors eliminate or select the best options.
Likewise, investors should avoid negative ROIs, which implies a net loss.
The role of ROI in AI
From recent data collected by a Harvard Business Review article, 77% of companies are either using or exploring AI this year (2024). With an adoption rate this high, expect winners and losers, especially regarding results and the ROI of AI.
Microsoft, IBM, and Deloitte have conducted studies by surveying 2,000 business leaders to show the ROI of AI. And one of the conclusion they get was that ROI of AI is not a one-size-fits-all number.
On one side there's the high side from use cases, concluding that these worldwide users are getting $3.50 dollars in return for every $1.00 their company has invested. While on the other side 5% of companies reported a return of $8.00 for every $1.00 invested.
The same study shows that “leading adopters” see a higher return. And they show the example of Atrium Health, where 84% of physicians reported an improved documentation experience, and 68% have recognized improved expertise in providing care. Atrium Health first identified documentation as a burden to the business’s topline that AI could improve.
Charting your ROI Roadmap
Just as you would put measurement tactics in place for a marketing campaign or your organization’s finances, you need a plan in place to track the ROI of your AI investments.
A Microsoft-sponsored study on the business opportunities of AI looked at how leading organizations are using AI to achieve eyebrow-raising results across industries. The study revealed that 92% of AI deployments take only 12 months or less. That means that most companies begin to see a return on their initial investment in less than a year. For 40% of organizations, that timeline was cut in half.
This means there’s a good chance you’ll start seeing a positive return on your AI investment in about a year. Yet, there’s still good reason to establish measurement benchmarks.?So far, 92% of AI deployments are taking 12 months or less, and 40% of organization had implementation times of less than 6 months.
Moreover, organizations are realizing a return on their AI investments within 14 months of deployments on average. This is leading to 43% of organizations planning to reduce spending in other areas of the business to reallocate spending toward AI.
That is, your organization may not be fully prepared to sink cash into an AI initiative just yet. And if leaders are pulling money from elsewhere in the organization (administrative support, tech support, HR, and customer service departments, for example), there’s even more need to be sure the ROI is there to justify the investment.?Planning to reduce spending in other areas of the business to reallocate spending toward AI.
How to calculate ROI for AI projects
It’s up to you to ensure that the ROI of your AI project adds up to be worthwhile. Here’s a formula we like to use to help determine the ROI of an AI investment:
ROI in AI = ((Cost?Savings?+?Revenue?Increase?-?Total?Cost?of?Ownership) / Investment Cost
Importance of Tracking ROI in AI Investments
ROI is critical for assessing the financial benefits of adopting AI technology, which often comes with a high upfront cost but can yield substantial efficiency, revenue growth, and cost savings.
Recent studies indicate that companies see an average return within 12-14 months, highlighting AI's potential for rapid payback.
Conclusion
The ROI metric is indispensable for businesses considering AI investments, offering a structured way to evaluate profitability and track performance. Companies can leverage ROI to make informed decisions, ensuring their AI tools drive meaningful financial returns and align with overall business strategy.
Sam Larios | Author
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