3. Determine your ROI
At its simplest, ROI is determined by subtracting the costs of the investment from its determined benefits in some number of future years.
But not every organization uses ROI. CFOs have a variety of opinions and preferences in this area, and many prefer to use internal rate of return (IRR) or net present value (NPV) instead. This is based on the crucial factor around the timing of the returns. IRR and NPV models will visualize this relative to your cost of capital.
But what goes into determining the benefits, and what are the costs you need to consider? Here are a few to consider:
Value to consider in ROI
When it comes to value, a project has both direct and indirect benefits.
Direct benefit examples:
- Increased revenue
- More efficient workflows that allow for more project capacity with the same headcount
- Earlier project completion and reduction in rework on projects
- Improved efficiencies within your organization
- Standardized processes that allow for scalability nationwide
- Elimination of cost around maintaining legacy systems and hardware
Indirect benefit examples:
- Higher client satisfaction due to more efficient workflows and a more collaborative space
- Improved morale of your workforce
- A more innovative culture leading to a continued flow of ideas and improvements that lead to direct benefits
A project also has costs and risks to factor into your ROI calculation.
- Direct costs: Examples include hardware, software licensing, implementation consulting, integration consulting, training and change management
- Indirect costs: Perhaps the best example of an indirect cost is the short-term impact to productivity for your internal workforce as they devote time to the technology implementation while still performing their normal day-to-day work.
- Potential risks: Examples include budget overrun and the project taking longer than anticipated.
Thinking through the lifespan of your investment
Picking a toolset that will take an excessive amount of time to realize benefits is one thing that can kill your IRR. Picking a platform that might have a shorter lifespan than you need can also kill IRR. This is why it’s so essential to pick the right platform and partner. Your partner drives time to value, while your platform determines how long you see returns.
Also consider that it just isn’t possible to earn the same return on software 20 years from implementing it as it is in the first 10 years.
So how do you think through the lifespan of your investment?
Moving from on-premises to cloud-based solutions, as well as picking a platform that is gaining traction in the market and being developed by a healthy and growing software publisher, should give you assurance that you’ll get at least 10 years out of your investment before you need consider replacing it with an updated solution.
Larger publishers with millions or even billions in annual R&D budgets help extend the life of your software, as they’re developing and pushing updates to your systems. These updates not only keep it on the leading edge but also make it more valuable to your organization in year five than it was in year one.