Adopting AI is not like pressing a button; it requires a commitment of resources. Gartner has predicted that by 2025, ‘90% of enterprise deployments of GenAI will slow as costs exceed value.’ What does this mean for your business? You will need to understand the return on investment (ROI) to make an informed decision about costs. Calculating the ROI of AI helps justify any investments and ensures that initiatives align with your company’s strategic goals and deliver tangible benefits.
Why calculate ROI before adopting AI?
Calculating ROI beforehand provides a structured framework to assess your AI project’s potential benefits and risks. On average, enterprise-wide initiatives yield an ROI of just 5.9%, which is below the typical 10% cost of capital. However, best-in-class companies achieve an impressive 13% ROI as they progress along the AI maturity continuum. Calculating ROI helps you:
- Justify investments: With significant upfront costs for technology, talent, and infrastructure, executives and decision-makers need concrete evidence of potential returns to justify these investments. ROI calculations provide the financial rationale to secure support from executives and decision-makers.
- Prioritise projects: Not all AI initiatives deliver the same level of impact. By comparing the ROI of different projects, your business can prioritise those with the highest potential return.
- Optimise performance: Monitoring and analysing ROI helps identify areas for improvement, ensuring that AI initiatives remain effective and aligned with business objectives. Iterative optimisation is crucial for long-term success.
- Mitigate risks: Understanding the financial implications of AI investments helps identify and mitigate potential risks, ensuring that projects are viable and sustainable in the long run.
Source: IBM.
Types of ROI
When evaluating AI investments, it’s essential to differentiate between hard ROI and soft ROI:
Hard ROI
Hard ROI encompasses direct, quantifiable financial gains and cost savings. Examples include:
- Time savings: Calculate time saved on repetitive tasks. For instance, AI-driven invoice processing can streamline operations, reduce processing time, and free human resources for strategic tasks.
- Productivity increase: When time spent on tedious tasks reduces, people can often become more productive. Calculate what else your organisation could achieve by adopting AI.
- Cost savings: AI lowers operational costs by reducing manual labour and errors. Automated data entry and AI-powered customer service chatbots are prime examples of technologies that deliver significant cost savings.
- Revenue increase: AI can offer new revenue streams by enabling new products or services. For example, AI-driven personalisation can increase customer engagement and drive higher sales.
Soft ROI
Soft ROI includes less tangible benefits that enhance overall business value but are harder to quantify. These include:
- Employee satisfaction: AI can take over mundane tasks, allowing people to focus on value-adding activities.
- Brand enhancement: Companies adopting AI might see a boost in their brand image, attracting more customers and potential business partners.
- Agility and innovation: AI projects foster a culture of innovation that enables businesses to adapt to market changes and explore new opportunities.
- Customer experience: Enhanced personalisation and improved service quality lead to better customer experiences, increasing loyalty and long-term customer relationships.
What is involved with calculating ROI?
Calculating the ROI of AI involves a few steps to ensure a comprehensive and accurate evaluation.
Understand your AI goals
What do you want to achieve by adopting AI? Defining clear, measurable objectives for your AI initiative is the first step in calculating ROI. Goals should align with the business’s strategy and address specific organisational challenges.
Decide whether you want to reduce wasted time, improve personalisation, boost customer support, etc. Clear objectives provide a solid foundation for evaluating the success of your AI investment.
Estimate implementation costs
Consider all costs associated with AI implementation, including technology acquisition, development, integration, and ongoing maintenance. Consider the following elements:
- Technology costs: These include the purchase of AI software and hardware and any custom development required to tailor the AI solution to your specific needs.
- Talent costs: Hiring skilled AI professionals can be costly. Include salaries, benefits, and training expenses in your cost estimates.
- Operational costs: Consider ongoing costs such as data storage, computing power, and system maintenance.
Choose your KPIs
Identify key performance indicators (KPIs) to measure the AI initiative’s success. These KPIs should directly relate to your objectives and clearly show the project’s performance. Selecting relevant, measurable, and aligned KPIs ensures that you can assess the impact of your AI investment.
- Cost savings: Measure reductions in operational costs due to automation and increased efficiency.
- Revenue growth: Track increases in revenue generated from new AI-enabled products or services.
- Process efficiency: Evaluate improvements in process speed and accuracy.
- Customer satisfaction: Use customer feedback and retention rates to understand customer experience improvements.
Conclusion
Your organisation must understand the ROI of AI before adopting it. Understanding ROI shows potential financial benefits and helps prioritise projects, optimise performance, and build stakeholder confidence. By understanding and measuring hard and soft ROI, your organisation can make decisions that drive long-term success and innovation. Investing time and resources in a thorough ROI analysis ensures that AI initiatives are aligned with strategic goals and deliver maximum value.
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