IT & ROI, BEP, and NPV explained Podcast Notes

1. IT & ROI, BEP, and NPV
Know your sh*t and make good decisions
DeWayneLehman.com

2. IT
Information Technology
This covers the Project Manager, Systems Analyst, programmers, engineers,
and UI designers, with some overlap into other fields.
Your UI designers will probably prefer to be called Graphic Designers or
Graphic Artists, not IT nerds.
Your PMP, or Project Management Professional, the Project Manager, may
prefer to be with considered in the Business field.

3. ROI
Return On Investment
What percentage of money are you going to make over the money you spent.
Lots of people get this wrong. So here it is.
If you invest $5, and you only get your original $5 back, you made 0% ROI.
If you invest $5, and get $7.50 back, you made a 50% ROI.
If you invest $5, and get $10 back, you made a 100% ROI.
If you invest $5, but only get $2.50 back, you made -50% ROI.
ROI over 0% is good, ROI under 0% is bad. So what does exactly 0% mean?

4. BEP
Break Even Point
I didn’t tell you that ROI isn’t just figured up once, but every year going forward,
usually 5 years.
Starting off, most ROI is negative. You spend a sh*t ton of money for new
hardware and software, and it takes time for that investment to pay off. You
can calculate the amount of time when the total amount of money you’ve put in
and the total you’ve gotten back are equal.
It’s the point you BREAK EVEN. They came up with a rather clever name
calling it the Break Even Point. This is when the project paid for itself.

5. BEP Continued
Here’s a little trick, too.
If the ROI over time is negative, you WILL NEVER BREAK EVEN. You can
actually have a negative BEP.
In other words, the only way you’re going to make money is to go back in time
like Marty McFly, and slap your dumb ass before ever proposing such a crap
project.
Negative ROI, negative BEP, negatory on proposing the project.

6. NPV
Net Present Value, which means, figure it up over time, but put it in todays
dollars… and NOT just using inflation but a “discount rate”.
WTF is a discount rate? It’s simply a way of saying, money today is worth more
than money tomorrow.
Why does it not mean just inflation?
Money is worth a LOT more today than it is tomorrow.
Let me get this crystal clear, so let me give you an example...

7. NPV Example
Let’s say you are offered a job at $50,000 a year shoveling coal on a steam
powered train.
The economy sucks, so you take the job. Now you have three options.
You can get the $50,000 up front, day one.
You can get $50,000 spread out over 52 weeks.
You can get the $50,000 at the very end, on the last day.

8. NPV Example Cont
Clearly, as a worker, you want the money up front. But, the employer needs to
know you’ll show up after taking the money, and you probably don’t want it
burning a hole in your pocket either. But clearly, this is the most valuable to
you, most expensive to the company.
But would you wait a year to get paid? Hell no! Why? It’s the same amount of
money.
“Yeah, but I have weekly and monthly bills, DeWayne. I gotta eat!” you say.
Exactly. That’s NET PRESENT VALUE.

9. NPV Cont
The same is true of companies. Money today is worth much more than money
tomorrow. This is why you have to be a really good customer to get NET terms
with a company. Net 30, Net 60, and if they really love you, Net 90.
That’s how late you are allowed to pay them after receiving your goods.
Net Present Value puts a dollar amount on future money. If that discount rate
is 10%, then $10k today is only worth $9k next year, $8k the next, and so on.

10. Here’s the trick!
Bad news…
ROI and BEP are calculated using the numbers of NPV, not straight dollars.
Good news…
Recurring costs for the system, such as buying software patches, are also
calculated using NPV.
This is why a subscription service for $10,000 over 5 years is cheaper than an
up front package costing $10,000 up front!!!!

11. Hammer This In!
Let… me… state… that… again…
Subscription services that cost the same over 5 years in real dollars as an up
front payment is CHEAPER because of NPV.
That’s because subscription costs are reduced costs over time, even if the
payment never changes.

12. What’s IT mean?
What’s this mean for IT?
It means that if a Google Apps for Business account costs the same as the
servers, operating systems, and software of an Exchange environment…
Google Apps for Business will still beat Exchange.

13. Going a step further
Because discount rates vary between businesses… small businesses have a
much higher discount rate than big businesses.
Apple could probably survive another 20 years without making a single dollar in
profit.
Your struggling coffee shop couldn’t survive a week without customers.
The Apple discount rate is higher than inflation, but still super low.
The Coffee Shop discount rather is so high, that money just one year out is
nearly worthless.

14. Why’s it matter?
If you are in IT, and you’ve run your little spreadsheet from the sales pitches of
big companies, you are probably just looking at dollar for dollar.
To you, sitting in your $1200 ergonomic chair, $25k is $25k, and “real”
businesses use Exchange, Office, Windows, etc.
IF YOU DO NOT GET THIS, YOU ARE A FAILURE.
If you don’t understand how ROI, BEP, and NPV works, you are FAILING your
customers. You are threatening the viability of their business!!!

15. What do I do?
It’s very simple. Learn math.
Get an ROI/BEP/NPV spreadsheet. Take all those numbers you were working
with, and plug them in for at least 5 years.
Now, NOW, you can project the real cost to a business.
And for many businesses, a “holy crap” light will go off in your head.

16. Budgets
If you can talk numbers, you can talk budgets. Now you can talk in your CFOs
language. Now you can explain why the IT budget must go up every year to
“maintain” the same level of service, because of NPV.
Now you can explain why your project is a killer idea, with a 300% ROI by
getting rid of Windows XP, getting rid of junk servers, lowering your mean time
between failures, and going with cloud services for things such as storage.

17. Stop Being Selfish!
Too many IT guys think new = better.
You’re thinking in tech terms. That’s fine, that’s what they pay you for.
But you have to learn to speak business. You have to make money.
Let me repeat myself…
YOU HAVE TO MAKE MONEY.
Time to go off script… Why businesses don’t exist to buy you toys...