Tips for Calculating the ROI of New SoftwareAugust 8, 2018 No Comments
Featured article by Susan Melony, Independent Technology Author
Return on investment or ROI is one of the most important performance metrics in any area of business. Despite the importance of calculating ROI for most business expenditures, it can be overlooked when a business introduces new software or technology solutions.
It’s important when purchasing and implementing a new software product to have a clear understanding of the value it’s bringing to the organization. For example, if a company introduces new corporate expense management software, they can look at specific points of measurement such as how much is saved on T&E costs, or the money saved by reducing human error.
While those are examples specific to expense management software, the following is a general list of tips and considerations when calculating the ROI of new software.
Understand the Relevance of ROI
Sometimes businesses don’t take the time to really look at the ROI of a software or cloud-based technology solution because they don’t understand the importance of doing so. However, doing an ROI analysis is important because it can help the business make more accurate projections for the future and more strategic overall decisions.
Basically anything in a business that can be decided upon using data should be done.
All technology and software purchases should be part of the bigger overall picture, and they should be squarely in line with strategic corporate objectives. Without doing an ROI analysis, there’s no way to say for certain if this is happening or not happening.
Estimate ROI Before Making a Purchase
A business wants to estimate their projected ROI on a new software or technology investment well before making a purchase. That’s one of the best ways to get buy-in at all levels for the introduction of a new platform.
Then, there should be specific estimates set for different time frames. For example, the actual ROI could be calculated in three months, six months and so on. When looking at the timeline and making forecasts and projections, a company should consider implementation. Software implementation can include the period of purchase and set-up, testing, and training users, as an example.
With any purchase, the horizon of investment is important. There can be big differences here depending on how quickly software can be deployed, but regardless of the specific timeline, it is an important consideration.
Categorize Financial Benefits
When a company invests in new software or mobile apps, they can usually categorize the financial gains they expect to derive. These fall into specific categories. These categories are increased revenue, reduced costs, eliminating costs, capital reduction and eliminating capital expenses.
If we were to go back to the original example of new expense management software, it could break down somewhat like this:
- Increased revenue could stem from the ability to gain more global clients because the expense management solution makes it easier for employees to travel, or employees might be more willing to travel.
- The cost reductions could stem from the fact that it’s easier to manage employee expenses with the use of modern software.
- As far as eliminating costs altogether, with expense management software a business might no longer have the costs associated with manual expense report processing
- Capital reduction might refer to the fact that fewer paper invoices or expense reports need to be stored
- In terms of capital avoidance, if there was automated expense management software a business might no longer have the need to expand the financial or accounting department
All of these factors can go into calculating the ROI of expense management software, as is the case in the example.
Be Thorough When Assessing Benefits
Finally, during an ROI analysis, sometimes businesses aren’t comprehensive when they look at the benefits of the new software or technology solutions. It may be necessary to look outside the box and outside of the most obvious ways new technology is benefitting a business.
For example, with expense management software it could be improving employee satisfaction. That, in turn, can lead to increased employee retention and reduced turnover. Those considerations need to be measured in some way and then included as part of the overall calculation.
It can be difficult to find ways to measure and assess these more abstract concepts, but it’s important to find a standardized way to do so because it’s extremely relevant to determining ROI of software, apps, and cloud technology.
There can also be parallel benefits to consider. For example, there may be the indirect benefit of having more leverage to negotiate with travel suppliers and vendors when you have the data and reporting from an expense management software product.DATA and ANALYTICS