Estimating the ROI of Custom Software
If you’re thinking about getting custom software made for your company, you should take the time to make an estimate of your expected return-on-investment (ROI). Even if you’re already certain that you need custom software and need it now, there can be benefits to putting together a formal estimate.
- When you pinpoint the specific reasons why custom software is a good idea, this may help you convince internal shareholders and decision-makers who may not be fully onboard.
- Being clear about the benefits of creating the software will make it less likely your company’s decision-makers will change their mind when faced with the costs of custom software development.
In short, being confident that you’ll be gaining a significant ROI can make the whole software development process smoother, more enjoyable, and more educational for you and your company.
We can’t give you a one-size-fits-all approach to estimating ROI; as you probably know, it’s a complex process with a lot of unique factors. But let’s review the major factors to think about when creating an estimate.
Get clear on the processes affected
Before trying to create an ROI estimate, you’ll want to get clear on what processes the software will affect. Steps in this process might look like:
- Talk to the employees who would be affected by the planned software. Try to ascertain how much employee time would be saved by the new software.
- Brainstorm the non-obvious effects of the software. (For example, creating a cohesive customer database may help make several departments more efficient due to not having to enter in the same data multiple times.)
- Talk to salespeople and/or customer reps: they may have insight into how the new software might help retain existing customers or gain new ones.
Time and costs saved
A simple way to start figuring out ROI is to list out the worker hours saved by a switch to the planned software. Employee costs are often the biggest expenditure at a company, so these savings can be substantial. Freeing up that employee time means you can find other, more productive ways for employees to spend their time—ways that create actual value for the company.
Making less errors
Every company makes mistakes. Creating a strong, efficient, software-reliant process plays a major role in reducing errors.
Errors can have many costs associated with them. Some examples of costs stemming from an error:
- Employee time has to be spent to correct it
- Money has to be spent to correct it
- A customer is lost due to an error affecting them, and their revenue is lost
- Excessive customer-facing errors can negatively affect your image in general
When making an ROI estimate, spend some time brainstorming all the possible ways the software would make your process more error-free, and all the possible ways that might save or make money for you.
Besides matters of efficiency and accuracy, sometimes companies want custom software to better serve their customers, and to create a competitive advantage. In fact, this is a major reason many of our clients initially approach us.
These days, customers often expect that a company will have their own application or cloud-based interface, if not as the primary service than as a supplementary one. A custom software solution can create an extra, powerful value-add for your customers.
One customer of ours, in the consultative financial sector, created a customer-facing portal to differentiate themselves from the competition. Within the first six months, the new software was integral in landing a new customer that more than paid for the cost of the software development. (Read the full igNew case study here.)
This use of software can help retain existing customers and gain new ones. What effect new software will have on your customer base is admittedly hard to pin down exactly. One way to get more clear about the effect would be to talk to customer representatives, salespeople, and the customers themselves to get a sense of how much value might be there.
For example, your salespeople might tell you that your company lost out on two or three of the last ten leads due to not being able to provide the service that the new software would be able to provide. Or perhaps you will hear directly from your customers that the new software features would make them more likely to stay with you in future.
If you can make an educated estimate as to how many new customers you expect to gain with the software, and you know the value of those customers, you should have a good idea of the ROI on this front. Creating such an estimate will also give you something to look back on when you're measuring whether the project was a success.
Cost of software development
Software development costs are obviously a big factor, and they can be large. But ‘large’ is always subjective. Once you’ve realized that your problem is also quite large, software costs can, in context, be very reasonable (or even ‘a drop in the bucket’ when compared with the ongoing costs of the problem).
Most custom software companies will do a discovery phase, where they delve deep into the requirements of your custom software and determine a cost.
When considering the cost of development, keep in mind that you are building something that is meant to provide value for a long time. Try to find a software development company that emphasizes building things right the first time, so that you aren’t stuck with the nightmare of ongoing maintenance costs and a buggy system. The more time and money you end up spending on fixing a subpar system, the more this will cancel out your ROI (which is why you were building the software in the first place.)
Time range considered
Whenever making an ROI calculation, the time range considered makes a huge difference. For example, taking an extreme case, if you only considered the year during which the software was created, you’d have a big expenditure and not much time to reap the rewards. Taken on a longer, multi-year time span, the rewards pile up, eclipsing the expense of the project.
When you make a plan for custom software, ideally you are planning for several years into the company’s future, so your ROI should take into account at least a few years beyond the initial implementation.
When tech-savvy companies plan software initiatives, they are thinking long-term and foreseeing issues they will struggle with years in the future. This is what makes these “tech-forward” companies so competitive and successful. The point here is to think long-term, as much as is feasible, when making your software plans.
If you have any questions about anything I’ve said here, or want to talk about whether custom software might be a good idea for your business, reach out to us with our online contact form here, give us a call at 502-272-1123, or email me at email@example.com
I’m David Galownia, the owner and President of igNew. igNew is a proven software development team; we’ve been building transformative solutions since 2005.
At igNew, we’re driven by a passion for solving problems and enabling your business to achieve greater heights through technology. Our clients are typically medium sized, high-growth companies who are striving to be more efficient, more agile, and more profitable. We will work with you only if we’re confident we can drive a substantial return on your investment.