How to Calculate the Benefits of Automation
Automation is often touted as the magic bullet for improving efficiency, reducing costs, and freeing up valuable time in businesses. Whether you’re considering automating a single process or a series of tasks across your organisation, it’s important to understand the tangible benefits before diving in headfirst. In this post, I’ll walk you through how to calculate the benefits of automation so you can determine whether it’s worth the investment.
Step 1: Identify the Process You Want to Automate
First things first: you need to understand which process you’re looking to automate. Automation is most effective when applied to repetitive, manual tasks that don’t require much creative thinking. Common examples include:
- Data entry
- Report generation
- Customer service responses (using chatbots or pre-set responses)
- Invoice processing
- Inventory management
Once you’ve identified the process, break it down into its individual tasks. For example, if you’re looking at automating data entry, track the steps involved from data capture, input, to storage.
Step 2: Calculate the Current Costs
Next, you need to calculate the cost of the current process without automation. This includes both direct costs (such as employee salaries) and indirect costs (like errors and inefficiencies). Here’s what you’ll want to measure:
Time
How long does it take an employee to complete the task or process? This is usually the most significant cost, so it’s crucial to get an accurate figure. If a task takes two hours a day and you have 5 employees performing it, that’s 10 hours per day.
Formula:
Time spent per task × frequency of task = Total time per day
Salary
What’s the cost of the employees performing the task? This will be the hourly wage of the employees multiplied by the time spent on that task.
Formula:
Employee’s hourly rate × hours spent = Labour cost per day
Error Costs
How often do human errors occur during this process, and how much do these errors cost your business? This could be mistakes that lead to lost revenue, increased customer service inquiries, or the need for rework.
Formula:
Cost per error × number of errors = Error cost per day
Total Cost
Once you’ve gathered the time, salary, and error costs, add them up to calculate the total daily or monthly cost of running this process manually.
Formula:
Labour cost + error cost = Total cost per day
Step 3: Estimate the Automation Costs
Automation isn’t free—there are upfront costs to consider. You’ll need to estimate both one-time setup costs and ongoing maintenance costs. Let’s break it down:
Upfront Costs
This could include the purchase of software, any hardware needed (like servers), installation fees, and employee training. For custom automation solutions, add the cost of development.
- Software purchase or subscription
- Development costs (if custom-built)
- Hardware setup
- Employee training
Ongoing Costs
Automation will likely require periodic maintenance, software updates, and possibly subscriptions. It’s important to factor these in to understand the long-term costs.
- Software licence fees
- Maintenance
- Updates
- Monitoring and support
Formula:
Upfront cost + ongoing annual cost = Total automation cost
Step 4: Compare Time Savings
Now comes the fun part—calculating the time savings from automation. If your automation software can reduce a 2-hour task to 10 minutes, that’s a huge win.
Formula:
Current task time – automated task time = Time saved per task
Multiply this by how often the task is done (daily, weekly, etc.) and by how many employees were involved in performing the task.
Formula:
Time saved per task × frequency × number of employees = Total time saved
Step 5: Calculate Cost Savings
Once you’ve established how much time you’re saving, you can turn this into monetary value. Time is money, after all.
Labour Savings
If you’re saving 5 hours of work per employee per week, multiply this by their hourly wage to see how much you’re saving in labour costs.
Formula:
Time saved per task × hourly rate × number of employees = Labour cost savings
Error Reduction
Automation can dramatically reduce errors, which can also provide savings. Calculate how much you’ll save by reducing human error—this could be fewer refunds, faster resolution of issues, or fewer missed opportunities.
Formula:
Current error cost – estimated error cost after automation = Error savings
Step 6: Calculate ROI (Return on Investment)
Now that you have both the costs and savings associated with automation, you can calculate the Return on Investment (ROI). This gives you a clearer picture of whether automation is worth the upfront investment.
The basic formula for ROI is:
Formula:
(Savings – Cost of automation) / Cost of automation × 100 = % ROI
For example, if automation saves you $50,000 per year and the cost of automation is $20,000, your ROI would be:
$50,000 – $20,000 = $30,000
$30,000 / $20,000 = 1.5
1.5 × 100 = 150% ROI
This means for every dollar you spend on automation, you’re getting $1.50 back in savings. Anything above 100% is a positive return on investment.
Step 7: Factor in Intangible Benefits
Not all benefits of automation can be easily calculated, but they’re still important to consider:
- Employee Satisfaction: Reducing repetitive tasks often leads to higher job satisfaction, which can improve retention.
- Scalability: Automated systems can scale more easily as your business grows, handling increased workloads without needing additional staff.
- Consistency: Automation provides standardised outputs, ensuring consistency in quality and process.
- Compliance: Some automation tools help with compliance and regulation adherence, avoiding potential fines.
While these benefits might not show up directly in your ROI calculation, they can still significantly impact your business.
Step 8: Make a Decision
By now, you should have a clear understanding of whether automation is financially viable for your business. If the ROI is strong and the intangible benefits look appealing, it’s probably worth moving forward.
On the flip side, if the upfront costs are too high, or the ROI is minimal, you may want to explore alternative processes or wait until your business grows to a point where automation makes more sense.
In Summary:
- Identify the process you want to automate.
- Calculate the current costs (time, salary, errors).
- Estimate the upfront and ongoing costs of automation.
- Measure the time savings from automation.
- Calculate the monetary savings (labour and error reductions).
- Determine your ROI using the savings and costs.
- Consider intangible benefits like employee satisfaction, scalability, and consistency.
- Make an informed decision.
Automation can be a game-changer for your business, but it’s critical to run the numbers before jumping in. By calculating the benefits of automation, you can make smart, data-driven decisions that will set you up for long-term success.