How to Calculate the Economic Efficiency of Implementing an EDS?

How to Calculate the Economic Efficiency of Implementing an Electronic Document Management System in a Company?

In the previous article, I posed the question of whether a company needs an electronic document management system. (https://documentolog.com/kz/blog/nuzhna-ili-net-sistema-elektronnogo-dokumentooborota-sed-kompanii). In this article, I describe the methodology for assessing the economic efficiency of implementing an electronic document management system (hereinafter referred to as EDMS), developed by our company. The existing methodologies today require the client to calculate investment costs, depreciation, and many other labor-intensive parameters, which is why they are rarely used in practice. We propose a methodology that is, on the one hand, simple and universal, and on the other hand, allows for a fairly accurate assessment of the economic effect for the company, expressed in monetary terms! We suggest calculating the difference between “all the company's costs for document management per year BEFORE IMPLEMENTING EDMS” and “all the company's costs for document management per year AFTER IMPLEMENTING EDMS”. If the figure is positive, the company "earns" or "benefits" from using EDMS; if negative, the company "overpays" and "incurs costs." Since each company is unique, the main question becomes how to calculate "all the company's costs for document management per year."

Calculating Costs BEFORE Implementing EDMS

Statistics for Companies in 2016

To calculate all costs, we used an approach based on economic theory and statistics, namely, building a predictive model based on historical data. Having worked in the market for over 10 years and with more than 150 EDMS Documentolog implementations in large, medium, and small companies, we analyzed the number of documents created in 82 companies in 2016 and obtained the following data:

This table allows us to estimate how many documents are created annually by each user in companies of different sizes, from 20 employees to 1500. For example, in a company with no more than 20 employees, each employee receives an average of 5 incoming documents per year, creates 4 outgoing documents, 8 memos, and so on. Other documents refer to all other types of documents that the company has automated using EDMS, such as assignments, protocols, and so on. Since this data is based on the analysis of real Kazakhstani companies operating in various sectors of the economy, it can be safely used as a basis for any company. The margin of error will be no more than 15-20%.

Having statistics on the total number of documents created by employees per year, we propose calculating how much the company will spend on working with such a quantity" "content": "documents, working 'on paper', that is, BEFORE IMPLEMENTING EDS. When working in 'paper' form, the company incurs direct and indirect costs. Direct costs include:

• expenses for purchasing paper,
• expenses for office supplies,
• printing expenses

indirect costs include:

• employee time for document approval,
• employee time for document copying,
• time for managers to make decisions,
• employee time for searching and processing printed documents,
• possible loss of documents, and so on.

Both types of costs for the company are expressed in money. Let's calculate both components.

Calculation of the company's direct costs

Table 2 shows the calculation of direct costs for the preparation and execution of 1 document. It consists of expenses for paper, office supplies, and printing.

Column 1.1 shows the 'Average number of pages in 1 document'. This data was also taken from our analysis of 82 companies. Thus, the average number of pages in an incoming document is 3.1, in an outgoing document - 2.9, in memos - 1.6, and contracts have the most pages - 13.9.

When working 'on paper', copies of each document must always be created at each stage of document execution (office, manager, executor, etc.). Thus, for an incoming document, the average number of copies created is 2.8, for an outgoing document - 2.1, for contracts - 2.3, and so on (column 1.2). By multiplying the number of pages in 1 document by the number of copies created, we get the total number of pages used for 1 document (column 1.3).

Knowing the number of pages in 1 document, including copies, you can calculate how much the paper for printing this document costs, based on the current price of 2 tenge per sheet (1000 tenge/pack of paper) - column 1.4.

When working 'on paper', employees use various office supplies. The calculation of office supply costs per employee is shown in Table 3.

We assume that, on average, a company spends 4200 tenge per year per employee. Knowing the average number of documents created by 1 employee per year (Table 1, 108 documents), the cost of office supplies per document can be distributed (Table 2, column 2).

Column 3 of Table 2 shows the printing costs for 1 sheet of a document. Since these costs vary greatly for each printer manufacturer and also depend on the volume of text on the sheet, we apply a very conservative approach - the cost of printing, including cartridge replacement and annual maintenance - 8 tenge per sheet (columns 3.1 and 3.2). The current average market price is 15 tenge per sheet. For larger companies that can use industrial printing solutions, the cost per sheet decreases to 5.6 tenge (column" {"content": "3.6)

Column 4 shows the final cost of printing one document, including copies for the company. This is the sum of columns 1, 2, and 3. Thus, the execution and processing of one incoming document for a company with 20 employees will cost an average of 126 tenge, for a company with 1000 employees – 108 tenge.

The total amount of direct costs of the company per year is presented in Table 4.

By multiplying the previously obtained figures, we find that for a company with 20 employees, the direct costs incurred by the company for working with documents "on paper" will amount to 49,119 tenge per year, for a company with 500 employees – 4,689,433 tenge per year.

Calculation of indirect costs or "opportunity costs"

We calculated the amount of direct costs of the company, but when the company operates in "paper" form, it is essential to also calculate the amount of indirect costs of the company. Indirect costs are mainly the inefficiently used working time of employees, for which the company nevertheless paid in the form of monthly salaries. After all, the working time of employees is a resource of the company, and any resource is money.

Since it is difficult to accurately assess the inefficiently used time of all employees for each specific company, in our methodology, we propose to go the other way and assess the effect of implementing an EDS on increasing employee productivity. The obtained figures can be called the "benefit received" from the implementation of an EDS or, on the other hand, the "indirect costs" of the company when working "on paper." Let's calculate how much this is in numbers for our methodology.

To assess the increase in employee productivity when implementing an EDS, I want to cite a recent study conducted by the leader in analytics, TechNavio, in 150 medium-sized American companies that have not yet implemented comprehensive electronic document management systems (EDS). It showed what percentage of working time employees spend on different stages of working with documents on average:

• on searching for them – 20%;
• on coordination and approval – 20%;
• on transferring them between departments – 10%;
• on preparing standard reports on the movement of working papers – 10%.

Thus, if the EDS implemented in the company allows:

• to reduce or completely eliminate the time spent on copying documents,
• to reduce the time spent on document coordination,
• to reduce the time spent on searching for documents,
• to shorten the time for making management decisions,
• to increase executive discipline,
• to eliminate document losses and guarantee their preservation.

Then it leads to an increase in employee productivity by 5-30% depending on the functionality of the EDS and the number of business processes automated with its help in the company.

Analysis of EDS Documentolog implementation projects from 2010-2016 showed that:

• for at least" } {"content": "
• 80% of employees in companies – our clients, consider Documentolog EDS as their main daily work tool, alongside email;
• 95% of employees in companies – our clients, do not experience difficulties with the simple interface of the program and start working fully after just 1 week of use;
• after 3-5 months of using the EDS, all internal documents and applications begin to be created only in electronic form, meaning employees' habits change;

Based on the above facts, we can confidently say that the productivity of company employees will increase by at least 5% after the implementation of Documentolog EDS.

Using the official data from the Committee on Statistics of the Ministry of Economic Development of Kazakhstan on the average salary in April 2017, we obtain the total amount of "indirect costs" or "benefits received":

Thus, the benefit received from a 5% increase in employee productivity per year amounts to 1,839,555 tenge for a company with 20 employees, 45,988,864 tenge for a company with 500 employees, and so on. At the very least, the company loses the same amount of money in the form of indirect costs when working "on paper".

Calculating Economic Efficiency

To calculate economic efficiency, it is necessary to calculate how much the company will spend per year on using the EDS, or in other words, "the company's expenses on document management AFTER IMPLEMENTING THE EDS". For this, we will provide data from the cost calculation calculator for Documentolog EDS, used under the SAAS model (EDS-as-a-service) for 1 year.

Using EDS-as-a-service has many advantages, which will be discussed in subsequent articles. The main thing is that under this model, the company does not incur any investment costs (CAPEX), only operational (OPEX), which allows for an accurate assessment of all company expenses over a 1-year period required for evaluating economic efficiency. In addition, using EDS under the SAAS model allows the company to further reduce its taxable base by reducing net profit by the amount of expenses on EDS usage, thereby obtaining an additional benefit of 20% (the corporate income tax rate in Kazakhstan) from the amount of expenses on EDS. In total, we get:

In total, the company's expenses BEFORE IMPLEMENTING THE EDS were: Payroll + direct costs of printing documents. Indirect costs are already included in the payroll.

The company's expenses AFTER IMPLEMENTING THE EDS are: Payroll + direct costs of printing + cost of using EDS per year – "benefit received" — savings on CIT. Here, it is necessary to explain why, after implementing the EDS, we consider direct printing costs. At the moment, the implementation of the EDS, unfortunately, does not allow for a complete abandonment of document printing, as it is still necessary for exchanges with external counterparties."}"} sending documents in paper form. From our practice, on average, 32% of documents are converted from the EDS back to paper form. In further articles, I will talk about the new solution from Documentolog – the Kazakhstan Center for Electronic Document Exchange, which will allow all external correspondence of companies to be converted into electronic form and reduce the "paper" circulation of documents to 5-8%.

By subtracting the "BEFORE" amount from the "AFTER" amount, we obtain the economic efficiency of implementing the EDS per year. For a company of 20 people, it amounts to 868,156 tenge! Thus, it turns out that the company, having purchased the EDS, additionally receives a significant economic "benefit" expressed in money!

Conclusions

We proposed a model for calculating the economic efficiency of implementing the EDS, which is based on the analysis of data for 2016 from 82 companies working in the Documentolog EDS. The calculation according to this model is automated on our website and can be easily used for efficiency analysis by companies from various fields of activity. In the model, various assumptions can be made, for example, the number of documents created by 1 employee per year, the total number of employees working in the EDS, the size of the salary, or by what percentage the productivity of employees increases.

Using the most conservative approach in the model, we obtained a result showing that the economic effect of using EDS-as-a-service is very significant in annual terms even for small companies. Moreover, the main factor becomes the increase in labor productivity of the company's employees, rather than the reduction of direct costs!

In this regard, in our opinion, any manager should definitely consider using the EDS in the company as an effective tool, primarily for increasing the labor productivity of their employees.

Kanafin Baizhan

June 2017