Custom software is a significant investment for any company. This investment includes money, time, and effort. Before you start your project, you want to make sure you have a good business case for it. You want to be sure that this investment will give you a reasonable return. [Hint: It probably will! Often our clients fully recoup their investments and start seeing returns within 12 months.]
Most custom tools do see a significant return on investment. But it is still a very good idea to do an ROI estimate before you proceed.
We like to look at ROI using 3 different categories:
- 1. Direct savings that are easy to calculate
- 2. Direct savings and revenue growth that can only be estimated
- 3. Intangible benefits that are real, but are more difficult to measure.
The distinctions between these 3 categories are not hard and fast. Some investment returns might fit into multiple categories. See how to estimate for each area of impact below:
Direct Savings That is (Relatively) Easy to Calculate
This part of the ROI calculation is the easiest and most precise (though even this will not be exact).
This is especially true when the software will result in employee time saving. Imagine that an employee typically takes 8 hours per week to complete a task using your current manual process. But she will only need 2 hours a week to do the same work once your custom app is in place. That is a time savings of 6 hours. You can then multiply 6 hours by the employee’s hourly rate to estimate the weekly savings. You could use calculations like this to estimate the total savings your new software tool will generate over a given time frame (typically yearly) and over its lifetime.
Another example of direct savings is if the new custom tool replaces older off-the-shelf software that you will no longer need to license. The total cost savings you will see is relatively easy to calculate.
Some of these calculations will be imprecise, but the exercise is still helpful. [Download SPARK's Free ROI Estimating Tip Sheet to help you get started.]
Indirect Savings and New Revenue Opportunities (Difficult to Calculate with Precision Beforehand)
Some software developers argue that you should try to calculate the exact amount your custom app will save you or help you earn. While we respect that position, we think it is too narrow. Many of the greatest ROI benefits from developing a custom solution are not even possible to calculate before it is in place. But that doesn’t make those benefits less real.
For example, let’s say that one of your mid-level managers spends 10 hours a week performing routine paperwork or tedious data entry. Once your new application is in place, she only needs 1 hour a week to do that same work.
She now has 9 extra hours per week to devote to higher level tasks that can grow the business. What if she uses those hours to develop an entirely new and profitable line of business?
The additional revenue the company generates because of her efforts is a result of the custom software that gave her more time to pursue those projects. But there would be no way of calculating that additional revenue before the start of the software project.
Or maybe all the time savings your new software brings to your team will allow you to complete two more projects each year. If you know the average net revenue each project brings you, you can get a ballpark sense of how much new revenue will come from your new app.
Consider the effect your custom software project could have on recruiting and employee retention. Employee turnover and recruiting are big expenses. In today’s competitive labor markets, every advantage counts. Working with up-to-date technology is very important for today’s workforce. This is especially true of its younger members. Studies have shown that younger workers expect to use technology at work that is on par with the technology they use in their personal lives.
So, having a custom software tool could help you retain your current employees and help you recruit new ones. The cost savings can be tremendous. But again, it is not easy to calculate beforehand (and possibly ever).
Or what if your custom app will reduce the scheduling mistakes or other mistakes that result from cumbersome manual processes? If you have an estimate of how much each mistake costs you, you can get an estimate of how much the software will save you.
Custom software also protects against business logic leaving your company. Sometimes the most important business logic (processes and systems) a company has exists only in the minds of certain employees. If they leave, the logic leaves too. The disruption and expense this causes can be significant. Building that logic into your custom solution protects you against that risk.
A custom app that does exactly what you want it to do can also set your company up for growth opportunities and scaling. Perhaps your current system leaves you unable to take care of more customers or take on more projects even if you wanted to. The efficiencies of your new software could allow you to grow in a way your current system would never permit.
Other Factors (Less Tangible, But Still Real)
There are other types of return on investment that, while real, do not always immediately and directly translate to dollars. Here are some examples that you might consider.
Having custom software that saves your employees from having to perform tedious manual tasks will likely result in happier employees. Yes, this will probably result in cost savings through a higher employee retention rate and lower recruiting costs. But it also makes your company a more pleasant place to work. And that has its own value.
Having the right software in place can also help your legal compliance efforts. And yes, that can save you money by eliminating fines and penalties. But it can also provide you with peace of mind. You won't have a nagging feeling that you might not be in compliance with an important regulation.
As a final example, having your own custom software can solidify your reputation as being a forward-thinking company. Yes, that can help with recruitment. Yes, that can help with business development. But putting those things to the side, it is simply nice to know that the company you work for has a good reputation.
We hope that this has given you a start in thinking about all the ways that building a custom tool that does exactly what you want it to do can benefit your company. Some ROI calculations can be very precise, while others are intangibles. But that doesn’t make them any less real.
Ready to start building the business case for your custom app and estimating the ROI you could see? Download SPARK's Free ROI Estimating Tip Sheet to help you get started.