An ROI Approach to Budgeting

April 27, 2015
Detailed evaluation of anticipated return on investment for each prioritized project helps gain project approval and maximize project results.

In my last two blogs, I discussed the importance of an automation roadmap and how to get started developing one. Hopefully, you’ve created a prioritized list of potential projects and are now ready to tackle how to budget for them.

Many people seem to think that in order to establish a budget, they need to develop a spec, reach out to vendors and conduct a formal Request for Quotation (RFQ) process. All of this takes a lot of time and energy, so I hope it is welcome news that I do not recommend this approach. Rather, look at it from a Return on Investment (ROI) perspective.

What payback period does your company expect on each investment? A two-year ROI seems to be an undocumented industry standard, but each company will have its own. Meeting or beating that payback timeline is typically important for project approval.

Once you understand the ROI, it is time to start evaluating each production goal and each production line related to that goal. Whether you are after increased production, improved efficiency, improved quality, reduced risk, or a combination of those, you need to establish the annualized gains of the improvements you are proposing. That is, calculate the additional revenue minus additional cost (or plus reduced cost).

To do this, you’ll have to make assumptions. Be sure to make note of these. They may eventually need to become part of your RFQ, and you may need to explain these assumptions to those approving your project(s).

Once you have the annualized gain, multiply it by the ROI period, and you have your budget, or at least a number you know you need to achieve for the project to even be considered. Go through this process with each of the items in your prioritized list.

Next, it’s time to do a sanity check on the numbers and start to establish a timeline.

Depending on whether you have the expertise, you can do this yourself or engage your vendors. Most vendors are willing to participate, as establishing a budget is a lot different than responding to an RFQ. Deriving a number that is plus or minus 30 percent and developing a timeline should be well within their wheelhouse.

Again, start with the highest priority items. Your goal is to establish a detailed plan for what can be done in the first year. Anything beyond that can remain a bit speculative. It is important to note that there are a lot of factors that determine your overall timeline. Every company varies in the size of its annual investments, how many projects can be supported at a given time and how much downtime can be absorbed. Tailor your timeline to what your company can support.

When it is time to submit your plans for approval, the ROI analysis and alignment with business goals will be valuable information. Make sure you include any assumptions you have made, especially those that are outside your control or information you did not know.

I cannot guarantee your projects will get approved, but I can assure you that your foresight and consideration for company goals will be appreciated.

The most difficult part is getting started. Once you establish your automation roadmap, maintain it! It is much easier to maintain this quarterly, or even monthly, than it is to start from scratch every year. At a minimum, keep that one-year outlook well defined, and maintain a list that looks an additional two to four years out. While the one-year outlook will help drive project approval, maintaining a holistic view of your projects will help ensure continuity in your systems and tight integration throughout your plant, which has tremendous efficiency benefits in and of itself.

The automation roadmap is a great communication tool, for use not only within your organization, but also with your vendors. As an automation solution provider, I can tell you that if we understand your business drivers, we can increase the value we bring to your company. We can use this information to help ensure the tight integration of systems mentioned above, as well as to identify emerging technologies that can accelerate you and your company towards your goals.

Michael Gurney is CEO of Concept Systems Inc., a Certified member of the Control System Integrators Association. See Concept Systems’ profile on the Industrial Automation Exchange.

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