The Enstep Blog

When an economic downturn starts to hurt, small businesses often hunker down and cut costs. But new technology solutions may be necessary for survival and growth—and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, we’ll review what ROI is, explain how an ROI analysis can help you save or make money, and provide guidelines for analyzing the ROI of a technology investment. Part 1: Understanding ROI There are two ways to look at the value of technology: total cost of ownership (TCO), which quantifies only the cost of a project, and ROI, which quantifies both the cost and expected benefit of the project over a specific timeframe. Traditionally, businesses have used TCO when analyzing the cost of internal infrastructure projects such as upgrading an e-mail system. But even with internal systems, ROI can be a better method: If your old e-mail system goes down, for example, your sales team can’t contact customers electronically and must spend more time making phone calls. If your employees spend two more hours on calls than they would on e-mails, you’ve actually lost money by not upgrading your e-mail system. When it comes to any non-internal technology, however, ROI has long been the gold standard. That’s because technology can drive profit growth by increasing revenue. Looking at ROI is particularly important when an economic downturn limits your budget. Indeed, an economic downturn may be the best time to assess your technology spending—because by investing wisely during a downturn, you can strengthen your future. As an example of how ROI works, consider the case of a small, high-end electronics boutique. The current point-of-sale (POS) software program is beginning to show strains from the company’s expansion and increasing inventory, and customer service issues are arising—a problem since the company’s mission is to provide exceptional customer service. The company’s owner believes implementing a new POS software program will help address these issues, but deploying it will be costly. The key question is which will cost more in the long-term: spending the money to provide a solution—or the losses the boutique will incur by not doing so? That question may be easier to ask than to answer. As important as determining ROI is, there is still little consensus about how to measure it accurately. ROI, it seems, is in the eye of the beholder. That’s because ROI has many intangibles—things that don’t show up in traditional cost-accounting methods but still maximize the economic potential of the organization, such as brand value, customer satisfaction, and patents. For example, a knowledge management system may not reduce your costs in obvious ways, so how can you justify it in a tight economy? You probably can’t if you measure ROI by asking what a project will do for your bottom line in a year. But if the new system leads different parts of your company to collaborate, which in turn produces better goods and services that lead to top-line growth, then your ROI is strong. In Part 2 of this three-part series, we’ll go into more detail about how a technology investment can provide a high ROI.Later, in Part 3, we’ll offer some guidance for conducting your own ROI analysis.

When an economic downturn starts to hurt, small businesses often hunker down and cut costs. But new technology solutions may be necessary for survival and growth—and they may not be as expensive as you think when you consider their return on investment (ROI). In this three-part series, we’ll review what ROI is, explain how an ROI analysis can help you save or make money, and provide guidelines for analyzing the ROI of a technology investment. Part 2: How ROI can Justify a Technology Purchase In Part 1 of this series, we examined the basics of ROI—and also noted that ROI is in the eye of the beholder because it has many intangibles. This month, we’ll go into more detail about the different ways a small business can realize a ROI on technology investments—even in an economic downturn, when the conventional wisdom is to cut expenditures. There are three ways that a technology investment can pay off: Reduced downtime. Some downtime is clearly associated with lost revenues: When your website is down, for example, revenue will be lost as a result of customers not being able to place orders. But when internal computers and networks fail, employees are idle—and this, too, could ultimately cost you money. Businesses that have upgraded and efficient IT systems, and those that have managed services vs. a break/fix model (also known as service on demand), simply have busier employees—and busier employees bring in more revenue. Increased productivity. Technology allows employees to do more work in less time. For example, a new database management application might improve timely access to accurate information (which would result in less time spent searching for data) or reduce errors (which would result in less time spent revising work or handling customer complaints). Or, a network with remote connectivity might result in less lost time when employees are traveling, Lower costs. Technology allows small businesses to spend less. For example, a new inventory management application might reduce inventory costs. A new teleconferencing system might reduce travel costs. And a new process management system might reduce headcount, which can lead to lower labor costs. Just how much could you benefit financially from a technology solution? As just one example, Microsoft surveyed 25 small businesses that used Microsoft Windows Small Business Server 2003, a network operating system that provides small businesses with secure Internet connectivity, an intranet, file and printer sharing, backup and restoration capabilities, a collaboration platform, and more.The average cost of the package was $11,650—which included $3,341 in hardware, $2,003 in software, $4,561 in installation, and $1,477 in downtime, plus incremental support. The 25 users surveyed saw a payback of total costs in just 4.9 months. The total average annual benefits were $40,409 and total three-year benefits were $121,227. The software resulted in an average ROI of 947 percent, with some companies realizing a ROI of as much as 2,000 percent. Getting at those numbers, however, may be the greatest challenge of ROI analysis. Because ROI is not one simple thing, there isn’t one simple way to measure the costs, returns, and benefits of a technology solution. In Part 3 of this series, we’ll look at the many different questions one must ask during a ROI analysis.

As a busy small business owner, you may not have had time to learn much about social networks. Or, you may think that social networking is just a way that teenagers “meet” other teenagers through the internet using applications like FaceBook or MySpace . However, many small businesses have found that social networks are a great way to get new customers and retain existing ones. According to Forrester Research (November 2008), membership levels in the leading social network sites are as follows: Bebo : 40 million Facebook : 120 million LinkedIn : 30 million experienced professionals representing 150 industries MySpace : 110 million Reunion : 32 million Second Life : 16 million Twitter : 5.57 million What is social networking? Social networking web sites allow you to connect with friends, family, and colleagues online, and to meet people with similar interests. The largest social networking sites have millions of members. Common to most social networking sites is the viral nature of building contact or friend lists and sharing with them. It is an exponential process. Mary knows ten people who each know ten more people – and soon there is a network of hundreds of people communicating with one another about what is happening in their lives. When new members join a social networking site, they provide profile information about themselves and their interests. They also have the option to join groups that have similar interests within the social networking space. For example, on MySpace there are 34 group categories, each with tens of thousands of separate groups. Many individual groups have over 10,000 members. People in the groups and forums provide information to one another about their experiences and thoughts. For a small business, the utility of social networks comes from these groups with similar interests. Here is a sample comment about a local dentist I found on a recent forum post: “Awesome Orthodontist (name withheld)! He’s got a great staff and they all have a great sense of humor … I live downtown Dallas and it’s worth the drive”. This type of unsolicited endorsement, read by potentially thousands of people, is worth much more than a paid ad. Social network members will trust words from people just like them more than they will believe slick advertising or yellow page listings. Social networking success story This recent news story illustrates the power of social networking: “ Electoral triumph built on a Web revolution ”. As Barak Obama considered running for President of the United States, he had a meeting with Marc Andreessen, the founder of Netscape and a board member of Facebook. Obama wondered if social networking could help him. “It was like a guy in a garage who was thinking of taking on the biggest names in the business,” Andreessen recalled. “What he was doing shouldn’t have been possible, but we see a lot of that out here and then something clicks. He was clearly supersmart and very entrepreneurial, a person who saw the world and the status quo as malleable.” The rest, as they say, is history. How your small business can take advantage of the power of social networking Tune in to what is being said about you on social networking sites. If someone asks a question that is within your expertise – help them. Track online comments about your organization or your products. If there is misinformation, provide corrections. Register with LinkedIn – this is a site specifically committed to linking businesses and professionals. Join in. Add your own comments to the blogs or upload short videos. Who is more qualified than you are to talk about your company? Small business owners are very busy people, and monitoring and interacting with social networks may seem like another task on your already full plate. This is where your IT consultant can help. By setting up monitoring and tracking alerts on your system, you can optimize the time you spend on these important activities. Your IT consultant may also suggest software services that help you assess the return on your investment.

A one-dollar reduction in the after-tax cost of research and development creates an additional dollar of new spending in the short term and two dollars of additional spending in the long term, according to the Council of Regional Information Technology Associations (CRITA)—but what small business can afford R&D in times like these? Those who use the federal research and development (R&D) tax credit, perhaps. The R&D tax credit, first enacted under the Economic Recovery Tax Act of 1981, provides certain companies with a tax credit for R&D expenditures used to introduce new products and services, improve current products and services, or simply enhance processes. The tax credit reduces the cost of capital, thereby mitigating the risks of R&D investment and allowing companies to “push the envelope” in the development of new products and services. In other words, your company might get a tax break simply by making its products or processes better. The R&D tax credit likely applies to more companies than you think it does. Contrary to popular opinion, the tax credit is not just for scientific research done in a large laboratory setting. Thanks to recently relaxed regulations, it applies to companies of all sizes in many industries, such as manufacturing, technology, software, and engineering. Examples of small companies that could potentially use the R&D tax credit are a 10-person company that designs and manufactures disk drives for personal computers, or a five-person company that develops software for streamlining real estate companies’ billing operations. And the list goes on. Companies involved in any of the following activities may also be eligible for the R&D tax credit: Manufacturing new products, processes, or formulas Developing new, improved, or more reliable products, processes, or formulas Developing prototypes or models (including computer-generated models Designing tools, jigs, molds, or dies Applying for patents Conducting certification testing Testing new concepts and technology Trying to use new materials Acquiring new equipment Conducting environmental testingDeveloping or improving manufacturing processes Developing, implementing, or upgrading systems or software Building or improving manufacturing facilities Using outside consultants or contractors to do any of the above activities If your company is eligible, you can generally claim a 20 percent credit against your taxes for qualified expenses above a base amount. Qualified expenses include in-house costs for wages, supplies, and a percentage of any contract costs. However, you must provide certain documentation showing that your projects are not just part of the ongoing cost of doing business. That’s where the tax credit gets tricky. For example, unqualified expenses include (but are not limited to) internal-use items, such as the installation and customization of software used by your company internally. In one case, a company increased efficiency and reduced costs with an administrative software package. It claimed the R&D tax credit for the wages of its computer programmers and analysts working on the system during its installation and customization. The IRS denied the claim. If you think you may be eligible for the R&D tax credit, you may want to contact your accountant now. The credit has expired and been extended many times—most recently in October 2008, when President Bush signed into law a retroactive two-year extension of the tax credit, from January 1, 2008 through December 31, 2009. In some ways this is good news. Because it is retroactive to January 1, 2008, eligible companies can take advantage of a full year’s credit in a single quarter. However, if it’s not renewed again, you only have a year left to take advantage of the credit. Finally, note that you may also be eligible for an R&D tax credit offered by your state. Your accountant can provide you with more information.

It’s almost impossible to find a company today that does not have a website that provides at least information about the company and ways to make contact. This is known as Web Technology 1.0, and it favors large businesses with significant resources to apply to their web presence. Today, meet Web 2.0, the next generation of internet-based information sharing. It’s richer and deeper in content, and broader in scope. So, what exactly is Web 2.0, and how can your small business take advantage of this new technology? What is Web 2.0? In the good old days (about four years ago), the web was comprised of sites published by companies that described their services and products – it was often nothing more than advertising. The web was flat and the information flow was one way. Web 2.0, on the other hand, favors quality information content and supports interaction. To appreciate Web 2.0’s advances, it is helpful to understand why people use the internet. As well stated by Janice Redish in her book on writing web content that works, “People come to the internet to answer a question or get help completing a task. They want information that is easy to find and understand, is accurate, up to date, and credible.” Web 2.0 is all about content that provides real information. Because many people now have access to broadband which supports fast downloads of data, Web 2.0 encourages expanding content types to include audio and video presentations. Finally, Web 2.0 takes advantage of links and tags. Links are websites referenced in your writing that add related content to the topic. Clicking on the link takes your visitor to the referenced site. Tags are metadata, which is data about, well, data. According to Master Media News ,  “ A tag is a relevant keyword or term associated with or assigned to a piece of information (a picture, a geographic map, a blog entry, a video clip, etc.), thus describing the item and enabling keyword-based classification and search of information.” How Web 2.0 can help your small business Web 2.0 can level the playing field between you and your larger competitors – those with bigger budgets. Remember: web searchers do not care if you are a large, well-established company or a small business just getting started. They simply want information and help. If you do that well, you will be perceived as credible, and you may win over a new customer. Your website embraces Web 2.0 by offering meaningful articles about your products, the technology behind them, and by helping buyers make an informed purchase decision. This is not selling; rather, you are educating and helping. When implementing the Web 2.0 philosophy, your site provides links to other sites that may help a customer or potential customer, even if that means mentioning a competitor. You are solving the searchers’ challenges by doing some of the search work for them. You can also encourage your visitors to add comments or suggest additional links. A powerful way to use Web 2.0 strategies is to post short, how-to videos about your products. For many people, pictures are more believable and provide better training than words. Think of the questions customers ask you, and offer video answers with the credibility of an expert. If this all seems to be beyond your capability, ask your IT consultants to help. Your IT consultant can add interactive services to your site and help create video and audio files, as well as suggest low-cost methods to increase the quality and quantity of information on your site.