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Doing the maths

Written by David Hathiramani on Monday, 07 January 2013. Posted in Technology

After a brief hiatus, our tech expert David Hathiramani is back with his methodology for making sure the numbers stack up on new projects

Doing the maths

There are certain times of the year that make you take time to stop and look around you; for me, the start of a new year is certainly one of them. Considering what 2013 might hold, I’ve been really thinking about what value for money means to my business and my team.

To me, quite simply, value for money is the amount you spend on a project versus the return you will get from it. If you spend more than you will get as a return (in the long and short term) then the project isn’t worth it. If you spend less than you will get in return, then the project should be considered. 

This is incredibly simplistic, and I am almost convinced that you as readers are feeling a bit patronised by me saying this to you. Having said that, in my experience, it is very difficult to judge what return you will see from a new project – and over what period. While I discuss this idea, I’m going to use IT as an example (as it’s what I specialise in), but it is important to note that these ideas relate to all business functions – not just IT.

In the IT world, for outsourcing companies, having to tie down a return on a project gives them two disadvantages:

1. If they give you a value, and a timeline, then the logical thing for you to do is insist that their payment is related to this.

2. They know that they can’t price any higher than this total value. 

It is difficult for employees to be able to think about ‘value for money’ too. It’s quite rare to have an in-house IT team like we do here at A Suit That Fits. And if you do, the chances are that the employees have come from an outsourcing company themselves and it is another skill to ensure projects are carried out in ‘value order’, as I like to call it.

For every IT project that we now consider, our CTO estimates the return – we then slot these into a priority list, and get on with them accordingly. This can be a difficult process as there is initially quite a lot of guess work involved. But as an entrepreneurial business doing things for the first time, this is something that everyone has to get comfortable with. 

Of course, the more you do something, the more you can look back at what’s worked previously, and what hasn’t worked so well and refine your guesses – eventually, you can be very precise. 

 

Here’s a little example about pinning down the value of a web refinement:

1. Take one of your web pages and dig into the data.

2. As an example, the analytics for the webpage may have seen 100 visitors in a month with a conversion rate of 1% and an average profit of £200. The monthly profit is 200 x 1000 x 1% = £2000. 

3. Someone in the team suggests a further development to the product page with a cost of £1000. 

 

But what return is it going to get?

A project like this would be too small to invest any more research into; instead, these gaps will have to be filled in by well thought-out estimates. And to be able to make an order of magnitude estimate of the project, the CTO will have to make a few guesses based on their experience including:

1. What will the increased conversion rate be?

2. How many more visitors will come to the page based on the further development?

3. Will there be any increased profit per transaction based on this?

 

As an example, our CTO might estimate:

1. An increased conversion rate to 1.1% based on past projects. 

2. An increased number of visitors to 1200 per month based on a similar project in the past. 

3. No increase in profit per transaction (unless there is a price increase in the product). Therefore, the increased profit per month will be the estimated monthly profit afterwards, less the monthly profit before. So the estimated monthly profit would be £200 x 1200 x 1.1%  = £2640 (a £640 profit increase). Therefore, at a cost of £1000, the project would take less than two months to pay back. 

 

These numbers are by no means certain, but they give an indication to the value of the project. This type of initial screening can help you figure out if a project is viable, and at best let you slot it into the right place in your team’s priority list. 

While this can never be exact and, of course, the real numbers will only appear once a project is completed, it is a reassurance to know that everyone in your team is attempting to grow the business in an entrepreneurial (and methodical) way. It almost goes without saying that is very important for your team to think of your project in terms of long-term brand equity, too.

I hope you’ve found this little insight useful; I find that ensuring our entire team (in every single department) thinks this way makes for a very efficient business. 

About the Author

David Hathiramani

David Hathiramani

He may be co-founder of trendy suit retailer A Suit That Fits, but Hathiramani is also something of a closet geek. And the Imperial College Computing graduate is here to impart some of his wisdom about setting up an internet business.

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