You've done your homework on electronic document management systems (EDMS) and found one that meets your needs. You are ready to take the next step in purchasing a system and would like to understand the cost justification before pulling the trigger on the purchase. So how exactly do you calculate the return on investment (ROI) for your document management system?

Current Conditions

Increasing business efficiency is the most compelling reason for investing money in any project. Technology has helped many businesses over the last 10 to 15 years become more efficient. Just replacing typewriters with word processors and calculators with spreadsheets initiated a huge increase in productivity per employee. Taking the next step is more challenging than simply replacing one tool for another as these programs were basically point solutions. Just maintaining the status quo requires businesses to move to the next level in office productivity and implement a complete document management solution.

What is ROI?

In layman's terms, ROI is the amount of time it takes to get the value of the dollars spent on a project or item back (returned to the business). For instance, if a large $50,000 lathe is purchased for a machine shop and a monthly profit of $10,000 can be tied to the lathe, then your ROI (in simplistic terms) is 5 months ($50,000/$10,000). This formula can be applied to virtually almost anything purchased; however, the effort to calculate a ROI is only done on medium to large investments, as the time spent can be extensive and requires gathering appropriate data.

Monetary Benefits of a Document Management System

Areas an EDMS will generate a return:

• Documents are stored in an electronic format, which is backed up and can be copied offsite relatively easily. Multiple copies of the documents can be made easily and cheaply. In contrast, a paper-based system would require copies of each piece of paper as they are generated. At a $.05 a page, this can become prohibitively expensive.


• Misfiled documents can be easily found using search capabilities built into the document management system. Misfiled documents in a paper-based system can be impossible to find depending on how and when they were misfiled.


• Filing documents is relatively easy, particularly if the document management system is integrated with other software packages. Filing paper documents requires a trip to the filing cabinet.


• Moving documents from one point in the EDMS workflow to another is simple. Determining who has a document or folder in workflow is available at all times. Finding a paper folder somewhere in a workflow can be difficult at best, particularly if it's buried on someone's desk.


• Moving from paper forms to an electronic version offers several benefits. Filling out paper forms can be tedious and prone to human error. Using electronic forms allows much of the data to be prefilled, eliminating these types of errors and speeding up the entry process.

How Do These Benefits Generate a ROI?

It is relatively easy to take the benefits listed above and determine if an office will get a significant ROI. Below are some ways to calculate a ROI for a system.

Physical Costs:

• How many filing cabinets do you have (a
  standard four-drawer filing cabinet requires at least 12 square feet of office
  space)? How many cabinets do you have?
  


• Do you rent an offsite storage facility? What is the monthly cost?


• Number of copies made of incoming documents — for instance, if an order comes in, how many copies are made and where do they go? More than likely, all of these copies are placed in filing cabinets in separate departments.


• How much do you spend on filing supplies per month? Ink for printers? Printer repair?

Labor Costs

• How long does it take to retrieve a paper document?


• How many people handle each document?


• How much time does it require to file a paper document?

A Sample ROI Calculation

To calculate a ROI for a small office, we'll use a financial advisor's office as a sample. Financial advisors generate paper with each new order, trade or account and the industry is regulated by FINRA and the SEC. This sample office will consist of two advisors plus five support staff for a total of 7 people. Let's assume that it's an average office and generates 100 new documents a week (this is a fairly low new document count but helps prove the point that an EDMS generates a great ROI). This office has been in business for 10 years and has a row of 10 filing cabinets in the back room. The spreadsheet below demonstrates the payback.

Additional ROI Considerations

It is evident an EDMS can be a very valuable tool for small to mid-sized businesses. The ROI calculation portrayed was done without taking into account the following factors:

• Lost documents become a thing of the past. The powerful search tools built into an EDMS make it virtually impossible to lose a document. In our sample office that generates 100 documents a week, 7.5 of them will be lost requiring the document to be re-created at a cost of $220 each. If the paper-based system being used is very efficient and this loss is reduced to 4%, the total is still a cost of $880/week. If the EDMS is inefficient and has a loss rate of 2%, the savings in using an inefficient EDMS is $440/week or $5,280/year. It's hard to calculate how much time and effort is saved just by not losing documents.
  


• Misfiled documents also become a non-issue. Again, the powerful search tools built into an EDMS allow misfiled documents to be easily found and re-filed in the correct place. At a misfile rate of 3.5% and a cost of $120/misfiled document, the sample office will save an additional $420/week or $5,040/year. Misfiled documents are a huge problem and can turn an office upside down when looking for misplaced documents.
  


• Answering a customer's query while on the phone with them is also a source of significant savings. Imagine the following scenario: A customer calls in with a question about their last order. If the customer service representative can pull up the document on their screen and answer the question right then without having to pull the file and call the customer back, a huge time savings is generated for the business. It is also more efficient for the customer and the telephone tag game is avoided. Being able to email the customer a copy directly has the same benefit.

Another time saving illustration not reflected above is using electronic workflow to distribute and route documents through an organization. Think of the time used in moving paper from one point in the company to another. Some companies still have a person that goes around and picks up paper documents and moves them from one point to another. With an EDMS this function is eliminated entirely.

The worksheet used in this sample ROI calculation can be downloaded at www.cabinetng.com/downloads/ROIcalculator.xls. Take a look around your office and plug in numbers that make sense for your business. What is your ROI?

ANDREW BAILEY [abailey@cabinetng.com] has 20 years of experience in the software industry and is president of Cabinet NG, a document software and workflow software provider, based in Madison, Alabama. For more information, visit www.cabinetng.com.