193
Chapter 22
Assessing the ROI and
Benets of New Technology
Dean Athanassiades
Management engineering involvement in cost justication of capital equipment dates back
decades. However, the classic techniques used for cost justication and cost–benet analysis of
capital equipment do not always apply to assessing the return on investment (ROI) and benets
of disruptive technology, especially information technology. is chapter reviews classic cost jus-
tication methods and explains why those methods may not always be appropriate for assessing
the return on investment and benet of current-day disruptive technology. e chapter proposes
techniques that management engineers can use to assess the return on investment and benets of
disruptive technologies.
Contents
Classic Techniques for Assessing ROI and Cost–Benet Analysis ..............................................194
Engineering Economy .........................................................................................................194
Discounted Cash Flow Analysis ...........................................................................................194
Present Worth Analysis ........................................................................................................195
Payback Period Analysis .......................................................................................................195
Benet–Cost Analysis ..........................................................................................................196
Evaluating ROI and Benets of Twenty-First-Century Healthcare Technology .........................196
Disruptive Technologies ....................................................................................................... 196
Techniques for Evaluating Benets and ROI of Disruptive Technology ....................................197
Auditable, Quantiable, Intangible Benets .........................................................................197
Example: EHR System.........................................................................................................198
Example: CPOE System ......................................................................................................199
Example: CDSS .................................................................................................................. 200
Summary ................................................................................................................................. 200
References ............................................................................................................................... 200
194 ◾ Dean Athanassiades
Classic Techniques for Assessing ROI and Cost–Benet Analysis
e management engineering body of knowledge contains substantial information about return on
investment and cost–benet analysis. For example, Holger George uesen authored the rst edi-
tion of Engineering Economy in 1950. George J. uesen and W. J. Fabrycky published the eighth
edition in 1993. A key premise of engineering economy (or engineering economics) is making
project selection decisions using quantitative techniques based upon discounted cash ow analysis.
Engineering Economy
According to uesen (1992), when one compares mutually exclusive projects, the cash ow dier-
ence between the projects should be the basis for selecting the most desirable project (see Figure22.1).
More specically, if one compares the cash ow from project A and from project B, if the cash ow
from project B is superior to the cash ow from project A (B − A > 0), project B is the superior proj-
ect. Conversely, if the cash ow from project A is superior to the cash ow from project B (B − A <
0), project A is the superior project. uesen (1992) further notes the importance of evaluating the
do-nothing alternative cautioning that failure to do so could lead to investing in a project that yields
a return below the minimum attractive rate of return. e chosen project is the one that maximizes
present worth and has a rate of return above the minimum attractive rate of return.
Discounted Cash Flow Analysis
Acquiring new technology often involves committing substantial capital to a project. According
to Lutz (1992), a capital expenditure involves an outlay of cash with expected future inows span-
ning two or more years. Because it is impossible to predict the future with absolute certainty, one
must consider multiple sets of alternative cash expenditures to identify the best option. In evalu-
ating capital expenditures, one must consider (1) all costs and the time when each cost occurs,
(2) all benets and the time when each cash inow occurs, (3) the economic life of each capital
NPV
(Project A)
NPV
(Project B)
Do
Nothing
Alternative
Chosen
Project
Choose project with highes
t
present worth that exceeds
minimum attractive rate of
return
Project Selection based on Engineering Economy Analysis
Figure 22.1 Project selection based on engineering economy analysis.
Assessing the ROI and Benets of New Technology ◾ 195
expenditure alternative, and (4) the interest rate that exists when each cost and inow occurs that
reects the risk of uncertainty.
e economic life of a capital expenditure is the number of years during which the expenditure
will return positive benets to the rm. When performing a cash ow analysis, the engineer often
constructs a cash ow diagram showing the positive and negative cash ows as vertical up and
down arrows on a time line (see Figure22.2 and Lutz, 1992).
When an engineer selects the appropriate interest rate for the analysis, a fundamental premise
is that a dollar received or expended one year in the future has a lesser value than a dollar received
today—the time value of money. e selected interest rate reects the minimum interest rate that
an organization expects to earn on its invested capital. e selected interest rate for the analysis
may be adjusted upward reective of the type of project and its risk. For example, an organization
may elect to adjust upward the minimum interest rate for cost reduction projects (lower risk) by a
dierent premium from a project to add a new product line or facility (higher risk) (Lutz, 1992).
Present Worth Analysis
e most common analytic techniques for comparing projects include present worth, future
worth, rate of return, payback period, and benet–cost analysis. Present worth compares the costs
and benets of a project using the current time (present) as the basis of comparison. If the pres-
ent worth is positive (benets exceed costs), the analyst considers the project as acceptable. If the
analysis compares multiple projects, the engineer should select the project with the highest present
worth. To use present worth, each project must have the same economic life. Future worth analysis
is similar to present worth analysis except the analysis uses a future time as the basis of compari-
son. Rate of return analysis determines the interest rate where the cash ows from the benets and
the costs equal zero (Lutz, 1992).
Payback Period Analysis
Payback period analysis determines the time required to recover the initial investment using a zero
interest rate. e capital expenditure alternative with the shortest payback period is the preferred
Discounted Cash Flow Analysis
Year 0 Year 1 Year 2 Year 3
Outflows
Inflows
Net Present
Value
Figure 22.2 Discounted cash ow analysis.
196 ◾ Dean Athanassiades
alternative in the payback period analysis. Although engineers often use payback period analysis,
this method fails to consider the timing of the cash ows or the duration of the cash ows. In
other words, payback period analysis does not consider the time value of money. Because of these
aws, payback period analysis is a proxy for risk rather than a true decision support technique for
selecting projects (Lutz, 1992).
Benet–Cost Analysis
Benet–cost analysis uses a ratio of benets to costs in project selection. e chosen project is
the one that has the highest ratio of benets to costs. Engineers can use the classic present worth
techniques in adjusting the future benets and future costs to the present time for comparison.
Engineers often use the benet–cost analysis technique in public sector project analysis. A chal-
lenge comes from the valuation of the benets and the costs. In classic present worth analysis, the
benets and costs represent quantiable cash ows. In public sector analysis, the cash ows seek
to estimate the benets and cost to society despite an inability to measure benets and costs from
a nancial accounting perspective. For example, if a new technology improves quality or patient
safety, the benet can be one of the most important benets the project provides, even though
putting a monetary value on that benet can be very dicult. In addition, the types of projects
analyzed using benet–cost analysis often span decades making the estimates of the benets and
costs subject to signicant variation (Lutz, 1992).
Evaluating ROI and Benets of Twenty-First-
Century Healthcare Technology
According to the Healthcare Financial Management Association, the purchase of new medical
and information technology represented more than 50% of hospital capital spending in 2001.
However, barriers to eective technology planning and purchase remain. For example, the direct
nancial benets from new healthcare technology come from reimbursement and coverage deci-
sions made by the federal government (Centers for Medicare and Medicaid Services), state agen-
cies, commercial health plans, and other payers (Coye and Kell, 2006).
Disruptive Technologies
Organizations often use return on investment (ROI) analysis to justify investments in new tech-
nologies. For example, a healthcare organization considering the purchase of a new magnetic
resonance imaging (MRI) scanner would consider purchase price, expected volume, and reim-
bursement rates, applying classic analysis to justify the project or to select the optimal project from
a portfolio of competing projects. Disruptive technologies are those that change business models
or aect the nature or ow of work within an organization. e eects of disruptive technologies
on an organization are dicult to estimate, thus making it dicult to build a business case for the
investment. For example, technologies like surgical robots, electronic health records, and comput-
erized physician order entry systems all oer benets to the healthcare system but have a great deal
of uncertainty related to costs, revenues, and classic ROI (Coye and Kell, 2006).
In addition, external stakeholders can inuence the economic evaluation of new technolo-
gies. Physicians inuence technology purchases, especially when a physician is responsible for
Assessing the ROI and Benets of New Technology ◾ 197
a signicant volume of admissions, thus directly aecting the volumes related to the analysis.
Consumers and patients also inuence usage volumes through their choice of provider organiza-
tions. As technology providers direct more marketing to consumers, this trend will continue and
grow. e actions of competitors can also aect usage volumes. e need to purchase a specic
technology like a surgical robot may come from the need to keep up with competing organizations
and support patient volumes that drive income (Coye and Kell, 2006).
Techniques for Evaluating Benets and
ROI of Disruptive Technology
Recognizing the dierences between classic technology and disruptive technology, Menachemi
and Brooks (2006) identied many challenges that exist when attempting to measure ROI for
healthcare IT. ey noted that a search of peer-reviewed publications yields few scientically
rigorous assessments. Menachemi and Brooks (2006) noted that many analytical tools exist for
performing ROI analysis. However, a number of obstacles exist in applying these tools in health-
care IT.
Auditable, Quantiable, Intangible Benets
Building upon classic ROI and cost–benet analysis, a useful technique for evaluating disruptive
technology projects comes from segmenting benets into those benets that are auditable, quanti-
able, or intangible. Auditable benets appear on an income statement or balance sheet. Engineers
can measure quantiable benets like improvements in productivity, employee engagement, or
customer loyalty. However, those benets do not appear on a nancial statement. Intangible ben-
ets are good for the organization and may benet the community but are not directly measur-
able. One can visualize the hierarchy of benets in a pyramid where the fundamental benets are
the auditable benets. e quantiable benets go on top of the auditable benets. e intangible
benets form the peak of the pyramid (Figure22.3).
For example, the benets produced by IT are dissimilar to benets produced by other capital
investments. In healthcare, capital investments like computed tomography (CT) scanners or MRI
scanners produce a direct income stream from a billable service. Conversely, IT enables, improves,
or enhances business processes. Traditional ROI methods are not eective in measuring the return
on business processes. As another example, the improvements in a business process that come from
IT investment often accrue across the enterprise, yet ROI analysis often focuses on measuring
costs and benets in specic cost centers (Menachemi and Brooks, 2006).
Another challenge in using conventional ROI comes from the paradox of benets not accru-
ing to the organization making the investment. For example, a hospital could invest in informa-
tion technology that yields benets for provider physicians or consumers who do not pay for the
services. e authors noted that 90% of the nancial benets of IT investment accrue to payers
and purchasers of care in the outpatient setting rather than to the party investing in the IT
(Menachemi and Brooks, 2006).
Many of the benets of IT do not directly translate into nancial terms. As an example, elec-
tronic health records can improve the quality of care and computerized provider order entry sys-
tems can reduce medical errors. Both of these important benets become dicult to dollarize on
a nancial statement. Finally, the most accurate measures of enterprise IT systems benets comes
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