New software investments can be a boon for your company, or they can result in substantial losses. In order to keep tabs on investments and determine which ones have been most effective for your company, calculating software ROI, or return on investment, is probably the most important metric to use. There are different ways of calculating ROI, but in general, the calculation for a simple ROI is as follows:
Simple ROI = (Gain from software investments – cost of investment)/(cost of investment)
Of course, different companies have different ways of estimating these values. While software that results in monetary gains may be easier to plug into this equation, evaluating the ROI of software that will result primarily in productivity gains instead of monetary gains can prove to be difficult. Though your company may have its own methods for predicting and/or evaluating ROI, here are 5 things to consider.
1. Predict ROI before you purchase
Even before you move to calculations of new software ROI, doing some common-sense evaluation of potential software is a good idea. When you’re thinking of investing in new software, it’s important to ask yourself what gains it will bring. Will this software bring more money in? Will it automate a process that was previously manual, or otherwise improve efficiency, leading to more profit? Essentially, if you can’t say that a potential program will somehow add value to your company, there’s no use in working to determine a specific ROI.
For many companies, it’s standard procedure to predict ROI before purchase and then actually measure ROI once the system has been integrated. Many studies have indicated that the companies with the most successful software implementations are the ones that predict ROI and then evaluate it once the software has been incorporated into the company.
Nobody knows exactly why this is. However, it’s likely that the reason behind this is that the companies who tend to be better at management anyway are the ones who have the most stringent policies when it comes to predicting and evaluating the new software ROI. Measurement is key to management, and these companies are experts at both.
2. Refine the Simple ROI calculation as needed
The simple ROI calculation listed above is a general guide to ROI. However, different companies will tweak this formula depending on what it is that they value in new software ROI. If you want your evaluation to be as accurate as possible and extremely specific to your company, you need to first ensure that your metric is specialized enough. Though only those at your company know what specifically needs to be incorporated in an ROI metric, here are some examples of tweaks that companies have implemented:
- Evaluation of ROI over different time periods – a new software system may initially have an excellent ROI, but consistent monitoring is important to make sure it does not lose efficiency or cost the company money.
- Incorporating other measurements – you may elect to also measure the rate of return. This metric evaluates the compound annual growth rate (CAGR). Some people use this in lieu of calculating ROI, and some use both.
- Setting hurdle rates – sometimes it’s wise to set limits or standards when it comes to investments or potential investments. For some companies, there’s a minimum ROI that must be achieved in order to justify investments. This could be a predicted ROI for a software system that has not been implemented, or a maintenance ROI for something that is already a part of the company.
3. Look closely at the software vendors and terms of sale
A software program that is successful will typically have a training program, user manuals, and more. Many vendors, however, do not offer training programs, resources, or events besides the FAQ page on the company website.
It’s crucial that your company is provided with detailed programs and materials to aid in successful implementation of the software. If your IT team is left with minimum resources, it’s likely that your company as a whole will not get the full benefit of the new software. Look for vendors who offer workshops in using the software, detailed manuals, and more. If the program does not come with sufficient resources, you can be certain that your company will run into difficulties shortly after investment.
Looking at the terms of the software contract is also vital to ensuring that your new software (or potential new software) will be able to keep up with the times. Look carefully at the terms of the contract. A good one will have provisions for updates and enhancements, and it will have renewal terms preferably each year. The business market changes quickly, and you don’t want to be stuck with old software and no options to renew it. You may be able to negotiate with the vendor, but be sure to do so before signing the contract.
4. Remain in dialogue with the IT staff
You company’s IT staff, if they are given the chance to work with an evaluation copy of the software, will be able to give you an estimate of the time and resources it will take to fully implement the chosen software. This is an important step, as cost of implementation can weigh heavily on a final ROI calculation.
5. Regularly monitor ROI
It’s important to keep tabs on the software ROI throughout its use. You may have an algorithm in place to measure constantly, or you may periodically have it checked to ensure that you are still getting an appropriate return on what you invested. Comparing the actual ROI to the one you predicted can also help you to adjust your prediction formula. If ROI begins to decline, you also will be able to have enough notice to start exploring other options.
Evaluating software and ensuring it stays at maximum productivity requires vigilance on the part of many people in your company. When you stay aware of your software ROI, though, you are taking steps to ensure your company will continue to gain from your current investments.