Measuring the Return on Investment in a Risk Management Information System
Before investing in a Risk Management Information System (RMIS), estimating the return on investment (ROI) is an important step in the decision making process. Whether it’s your first RMIS or you’re contemplating switching systems, the costs of these system can seem very high. Determining the ROI will help quantify the business case for the investment.
ROI is a common metric used for evaluating, approving and measuring the success of any significant investment, including software purchases. Research indicates that many companies do not measure the ROI for software investments, but the evidence supports the benefit in doing so. There are many ways to calculate the ROI, but the basic formula is:
ROI = (Gain from the investment over some period of time – Cost of investment over same period of time) / Cost of Investment over same period of time.
The first step is reviewing business processes, performing a thorough needs analysis and understanding your organization’s total cost of risk. That foundation will provide the insight to determine potential gain from an investment in a RMIS. The gain from an investment in a RMIS will vary by organization, but areas to identify gains can be broken down into three broad categories.
Risk Management/Administrative Costs – a RMIS can help improve and automate your risk management functions. A review of the needs assessment that should already have been performed is a good place to start to identify areas where a RMIS can assist. From process improvement to increased productivity, a RMIS can save significant time in administrative costs.
Risk Transfer Costs – a significant portion of a company’s total cost of risk is spent on risk transfer. A RMIS should improve the quality of the information that is available to make decisions and to provide to underwriters. Better information leads to better decision making. Retention levels, policy limits and credit levels can be evaluated using historical data and what-if scenarios to help make the best decision for your organization.
Retained Risk Costs – having risk information at your fingertips gives you the ability to improve the results of your company’s retained risk cost. Evaluating your loss data and exposures to make informed decisions on areas to focus claims management and safety efforts can help reduce retained claims costs and improve safety effectiveness which will in turn reduce your overall costs and prevent risks.
In addition to these areas a RMIS may allow you to do things that you previously could not do. These new capabilities provide a value that should be included in any potential gain. An example from implementing a RMIS is the potential in greater visibility for the risk management function to senior management and throughout the organization. While it is difficult to measure these types of benefits, they should be factored into the decision-making process.
The cost of the investment should include the following:
Direct costs of the software, hardware and services to implement the RMIS;
Ongoing maintenance and support of the software multiplied by the number of years you are going to measure the ROI. Typical ROI calculations for software investments range from 3-5 years;
Indirect costs to implement and support the system. This includes internal costs to implement, support and administer the system for your organization.
With all of this information you are ready to calculate the ROI for the system investment. The ROI should be compared to other investment options, including doing nothing at all. Determining your ROI is not only helpful in the decision-making process but it can also help in measuring the success of the implementation and utilization of the software in years to come. The ROI targets that are identified in the business case should be used to measure the effectiveness of the RMIS.
Risk management is more than just insurance and risk avoidance, it’s about improving risk awareness throughout the organization. When purchasing a RMIS, it should support the goals of your risk management program, provide a measurable and significant ROI and help manage the total cost of risk.