How to calculate ROI of a necessary feature to an existing sytem?

Question

I have a business system that works well and is currently in maintenance mode, using up maybe 5% annually of its original cost. So if it was 1,000 hours of development early on, annually we work on it <= 50 hours, which falls into our definition of 'maintenance'.

A strategic business partner is requiring us to implement a feature in this already-built business system. This system makes $1M in annual profit for the organization.

How do I go about calculating the ROI of this requested feature? The system will not change its revenue, but if we don't implement this we won't be able to keep the business. It seems disingenuous to say that this feature will "benefit" us $1M as that seems to overstate its significance. At the same time, we need it.

Answer 1

Calculating ROI for individual investments that don't provide additional benefit but only or mainly prevent loss isn't always meaningful. This becomes apparent if you look at possible combinations of such investments.

If you were required to implement two features A and B to prevent a loss of $1M, is each feature's ROI $500,000 or $1M? Both values can't be right at the same time, it's clear that taking one feature away would cost $1M, but implementing both doesn't give you $2M.

If both feature needs come up in sequence, the economic situation is equivalent, but you will need to decide on the first feature without knowing about the second one yet. Does this cut the ROI of the first feature in half when the second one comes up, or does it even nullify it completely because it won't be worth anything if you don't implement the second one, too?

The ongoing costs of staying in business are not separable investments, you should not try to assign ROI values individually. Of course, that shouldn't keep you from calculating total costs to determine whether your business is profitable.

Answer 2

The answer to your question will depend on how your organisation defines value.

Value isn't just about changes to revenue/profit. There are many forms of value, such as:

• The cost associated with not making a change
• The value of removing or lowering a risk
• A strategic decision
• Compliance/regulatory

...and many more.

The question then becomes: how do you quantify value in your organisation? Do you put a $ value against all the various forms of value? Some organisations do something like that, using an internally agreed approach.

For example, a company might say that the value of removing a risk is a factor of the potential damage from the risk multiplied by the likelihood of it happening. In your case this could go something like:

The loss of the strategic business partner for this application might cost us $1M. If we don't implement the feature they are asking for the likelihood they will stop using the application is 5%. Therefore we decide to put a value on the feature of $50K.

This is an arbitrary example. It would be down to the organisation to come up with an approach they believe fits them best.