The Money Files

Payback period is an investment analysis technique and it’s personally one of my favourite tools to use for investment appraisal because in my view it’s the easiest to understand of the tools at my disposal.

Today I’m going to work through an example to show you what it looks like. But before we do that, let’s remind ourselves why we might want to use it at all.

Why Do An Investment Appraisal?

Investment appraisals are what goes into your business case to show why your project is financially viable. They are decision-making tools.

The investment appraisal also allows the decision makers to compare your project with others, which they’ll need to do as all the projects are competing for the same corporate funds. The figures from the investment appraisal, and the associated blurb in the business case, confirm why the project is worth the investment based on forecasted cost and time. It justifies the project based on the expected benefits.

So, investment appraisals matter because they help get your business case approved. Obviously, if the numbers don’t stack up then your project doesn’t get approved. Investment appraisal techniques help you show the cost and benefits of your project in a way that makes it easy to compare with others.

What Is Payback Period?

There’s a little video I made about payback period here, but in essence it’s this:

Payback period is the time taken to recoup the project investment.

Let’s take an example.

A project costs £1,000,000. The benefits are:

• Year 1: £500k
• Year 2: £300k
• Year 3: £200k
• Year 4: £200k
• Year 5: £200k

As you can see from the graph below, the project investment equals the benefits for the first three years, so the payback period is three years.

In other words, you’ll earn back the amount spent on the project through the project’s benefits once three years have passed. At that point you ‘break even’. Benefits from Year 4 are cash in the bank.

From a business case and project justification point of view, the shorter the payback period, the better.

Problems With Payback

So far, so straightforward.

The problems come when you try to be a bit more sophisticated.

For example, payback period doesn’t take into account discount rates (how much money will be worth in the future: is the £200k benefit in Year 4 really worth the same as £200k would be today?).

As with all investment appraisal techniques you can’t measure intangible benefits in this way. Payback is only good for working out the financial side of benefits: the monetary cost and the financial benefit gained.

That makes payback period a bit crude but as long as everyone is aware of the limitations, it can still be a useful tool to forecast when the project will break even and start to turn a profit.

There are other ways that you can put financial information into your business case: Net Present Value and Discounted Cash Flow are others.

What investment appraisal techniques do you use?

Always a fan of a snazzy graphic, I put this one together to summarise the things that you should be including in your project business cases.

Do you (or your management team) include all of these in your business case template? What else do you think should be in there that I haven't covered below?

My irregular Ask The Expert feature is back! In today’s interview I talk to Eileen O’Loughlin, market research associate at Software Advice, about trends in collaboration tech, building a business case for investment and more. We started by talking about the nature of the teams that use these tools.

Eileen, what sort of teams work remotely?

All sorts of teams can work remotely. Advances in communication and collaboration software help facilitate a standardized work environment for employees across industries whether they’re in or outside the office.

In fact, a report by WorldatWork found that in 2015, 80% of North American companies offered telecommuting and flexible work arrangements as a competitive benefit.

That being said, we see a high number of remote workers in more tech-centric industries, such as IT services (and related software and technology fields) as well as marketing and advertising. These fast-paced industries use project management software to help structure their workflows and increase communication and collaboration among employees.

In your experience, what does remote collaboration look like? Do you always need software to do it?

Although teams don’t require specialized collaboration software (after all, as our analysis has shown, email remains one of top go-to communication tools used by remote teams), collaboration software has capabilities not available in other methods that benefit the user tremendously.

Take a marketing team, for example. Using a collaboration tool with content management functionality, teams can upload and store documents in a centralized location, share files, track changes—even edit the same document in real-time.

That same team trying to collaborate over email faces version control issues, productivity loss due to a lag between responses, not to mention the potential for error and miscommunication over long email threads.

Yes, I can see that being the case. How can you justify the cost of adding new software into your business when it's hard to measure the ROI?

The business case for investing in a collaboration platform can be made easily. Studies have shown that on average, less than 40 percent of an employee’s time is spent on work-related tasks. The rest of their workweek is spent coordinating and communicating with team members. As such, a platform that helps streamline this process can increase worker productivity and provide sufficient ROI.

Wow, that’s really interesting! Any other tips for helping build a case?

Collaboration software helps centralize a team’s communication and collaboration efforts. Managers can create schedules, assign tasks to workers and track the time it takes each worker to complete each task. Team members know what is expected of them and when it is due.

Team calendars are a common feature of collaboration software. These tools provide managers with visibility into employee workloads, current and future availability and can even help identify issues before they become problems. For example, managers can set up automatic notifications to alert employees of an impending due date, prior to the deadline being missed.

Are you noticing any trends in remote collaboration and the growth of virtual teams?

One trend that stands out is the shift toward BYOD collaboration. Cloud-based collaboration software can be accessed from any location, on any device with an internet connection. Employees that have a personal mobile device, such as a laptop, iPad or even a smartphone, are already set up to work remotely.

Why do you think BYOD is taking off?

Many employees prefer to use their personal devices, due to familiarity and convenience. With BYOD, organizations have more freedom to invest in a software that connects employees, rather than spending on office hardware.

So where do you think collaboration software is going next? More consolidation in the marketplace or more explosion? And what does that mean for managers?

The mobile workforce is growing at an exponential rate. As such, it’s imperative that remote employees—and the managers of remote employees—are comfortable relying on technology to communicate.

Managers should take steps to ensure that requirements for virtual teams are clearly defined and understood by both parties. For example, if remote workers need to be active in a group chat, or have a one-on-one video call with their manager once a day or once a week. Carefully outlining any rules and regulations helps create trust between management and remote staff.

Thanks, Eileen!

More about my interviewee: Eileen O’Loughlin is a Market Research Associate at Software Advice. She joined the team in 2015 and covers the accounting, project management, legal management and professional services markets.

Eileen received her B.A. in English Writing and Rhetoric from St. Edward’s University in Austin, TX. When she’s not in the office, Eileen enjoys spending time outdoors, visiting with friends and family or reading a good book.

In this video I talk about the different types of complexity that you might face on your projects, as inspired and defined by Cranfield University.

I hear a lot of negative stuff about outsourcing. How it’s hard work, and not cost-effective, especially if you are in the charity sector or another sector with tax breaks. That’s because of tax rules (at least, over here) that say while you can’t charge VAT on services such as healthcare, you have to pay suppliers VAT. Moving services inhouse and not relying on outsourcing partners can chop a 20% bill (or whatever your tax bracket is) off services.

But you can make it work. If commercially it’s right for you and you’ve made that leap, you still need to put some effort into making sure that the partnership is a positive experience on both sides.

Here are 5 tips for making outsourcing work for you.

1. Negotiate The Right Payment Terms

Link your desired outcomes to how you are going to pay your outsourcing partner. In other words, think about how your payments can be structured along business benefit lines. For example, if you hit x% of target the payout above the basic rate is $y.

Think about ways that you can incentivise your outsourcing partner to have goals that are totally aligned to yours through their payment structure.

2. Manage Them Closely

You can’t put an outsourcing agreement in place then walk away.

Or, you could, but you shouldn’t expect great results if you do that.

Make sure that you manage specialist contractors in the same way that you would your own team. Use governance and oversight to keep an eye on what they are doing on  your behalf. Track their progress regularly.

If you do go ahead with outsourcing remember that you can’t (or shouldn’t) outsource responsibility for tasks or processes. Especially on a project: you’ll still remain the person ultimately responsible for the outputs and outcomes. If something goes wrong, it’s your project that will suffer, so keep a close eye on the work that is going on.

This isn’t about micromanaging; more about making sure that you’re goals are met. You wouldn’t expect to give someone else a task and hefty salary and then never check up on them, would you? So don’t do it with third parties either.

3. Choose Your Partners Carefully

If you can find partners who have a similar work ethos and company culture to yours it will make the process of partnership far easier.

Ideally, look for people who will help you achieve your business goals in ways that support your own efforts. Your tendering process should help you identify companies that are a good fit, so make sure your questions and tender documentation address the important questions in this area.

4. Don’t Outsource For The Sake of It

So all your industry peers are busy outsourcing? Outsourcing is cheap? That doesn’t make it the right solution for you. You could still find more value or a better outcome by upskilling your existing team, hiring someone to work in-house, changing your delivery model or doing something else.

Outsourcing isn’t always the answer!

5. Know When To Break It Off

Don’t be afraid to switch out your partners if they aren’t giving you the service or return you expect. What might have worked for you both 12 months ago may no longer be the model that you want to use.

It is always better to leave agreements like this on good terms. Talk to your partner about your intentions and how you intend to manage the work going forward. Ask how they can help you do the transition and put together join plans to move smoothly into your new operating model. Don’t burn bridges if you can help it: the professional world is a small place and you are very likely to cross paths with either the company or the individuals you worked with in it at some point in the future.

Having and maintaining a good working relationship for the life of the outsourcing agreement is something that will make exit that much easier. Even if you have no intention of parting ways right now, think about how you would in the future. The strong ties you build now will help you when (if) the time comes to move on.