What Is Software ROI and How Can You Calculate It?

Alt Title: How Do You Calculate Software ROI?

You might be familiar with the concept of return on investment (ROI), which surfaces in many different fields. You might understand ROI as it relates to stock marketing investing, marketing and advertising, or something else.

But perhaps you are not familiar with the concept of evaluating the ROI of software platforms for your business. Do you know what software ROI is, exactly, and how to calculate it?

The Basics: Software ROI

The concept is similar to  ROI in other applications. You focus on calculating the amount of money generated or saved by a given resource, compared to what you spend on that resource.

For example, if you purchase a share of stock for $100, and this year it rises to $125, you can claim a return of $25, or 25 percent. When it comes to software, the equation is slightly more complex – as we’ll show you – but the fundamental concept is roughly the same.

Why Software ROI Matters

Software ROI matters for several reasons.

·       Proving value/effectiveness. For starters, ROI empowers you to establish the value or effectiveness of a particular software solution. If you have to justify the purchase of a new platform, ROI can help you do it. It can also provide peace of mind when you can calculate that you made the right decision after you’ve used the software for a while.

·       Identifying and mitigating weak points. If your ROI is lacking, you can use it as an impetus to dig in and identify or mitigate the weak points of this particular software. For example, would the ROI be higher if your employees understood how to use the platform better? Could you boost the ROI by using the program in conjunction with a similar, integrated platform?

·       Making strategic cuts. Depending on industry and company size, most businesses spend between 1.4 and 11.4 percent of their revenue on software. Many of these platforms are indispensable, but it’s also true that some organizations suffer from software bloat. If you calculate the ROI for each software platform in your organization, you can make informed, strategic cuts to save money and preserve your most effective tools.

How to Calculate Software ROI

How do you calculate the ROI of a given piece of software? The simple form of the equation is to compare the amount of value the software generates to the amount of money and time you spend on it.

But this equation also features some complexities that make it less than straightforward.

·       Calculate core costs. Let’s start with an easy one. Calculate the core costs of using this software. How much are you spending per month to remain subscribed at this level?

·       Calculate time costs. Next, think about the time costs. How long does it take you to train people to use the program? How much time do they spend using it? Are there any maintenance or optimization tasks that also cost you time?

·       Calculate direct value. Next, focus on any direct, measurable forms of value this software platform provides to your organization. For example, can you firmly demonstrate that the platform is responsible for generating more leads for your organization? Has it completely eliminated other costs, such as the full-time salaries of additional employees?

·       Calculate time savings. How much time does this software platform save you? You might be spending 100 man-hours on this platform every week, but if you save 200 man-hours, that’s more than worth it.

·       Consider other variables. Calculating software ROI is difficult because there are hundreds, if not thousands, of potential variables to figure in. Software can add value in nearly invisible ways sometimes, but it can entail nearly invisible costs, so you have to be comprehensive. For example, if this software platform is frustrating to use, it may reduce employee retention; but at the same time, if it helps you serve customers faster, it could boost your company’s reputation.

How to Optimize Software ROI

Once you have a formula for calculating software ROI, do you know how to optimize ROI for all your software platforms?

·       Practice minimalism. Adding more software platforms isn’t always better. In fact, it’s usually preferable to arrive at the smallest number of platforms that will keep your organization running. The goal is more streamlined work experiences, lower costs, and fewer complexities and vulnerabilities.

·       Choose flexible and growing platforms. Software platforms become more valuable when they’re flexible enough to accommodate many different functions and capable of evolving over time. Select platforms that are supported by their developers and that enable you to accomplish a wide range of different tasks.

·       Consider open-source software. Open-source software is entirely free, which completely optimizes one half of the ROI equation. There are some pros and cons to using open-source software, but it’s definitely worth considering.

·       Prioritize intuitive and user-friendly platforms. You’ll save time and your employees will be happier if you put intuitive and user-friendly platforms in place. Don’t waste your time or money on software that’s unduly challenging to use.

When you have a better understanding of software ROI, you might be able to make strategic reductions in your organization, perform better due diligence when you scout new software platforms to add, and ideally boost the profitability of your business.

Just make sure to employ this methodology regularly so you can keep tabs on how your software platforms are performing in the macro sense.