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Does your company calculate the ROI on softwares? Until a couple of years back companies rarely justified software purchases. Critical purchasing decisions were based upon intuition & not on elaborate ROI calculations. With the slowdown & increased pressures to cut costs, software purchases today undergo detailed scrutiny in the finance departments of companies with few exceptions. Return On Investment (ROI) is defined as the present value of all savings from the proposed investment during the expected life of the software. However, all softwares may not justify an investment of time & resources for ROI calculations. A company policy can be framed to make it compulsory for ROI calculations for software that cost more than a certain amount. This is not a foolproof way though. On the Internet, the first mover advantage is big. For example, a company may decide to integrate its supply chain by using a web based extranet. The infrastructure available with its suppliers & distributors may not be adequate at that point of time to justify the investment. A small fraction of the supply chain may be able to go online & a mix of online & offline models may actually increase costs & decrease efficiency. But a visionary senior management may still opt for the first mover advantage. In the long run, it would help the company to get that edge over its competitors. With the software & mindsets in place, this company would be able to take the most advantage of the new infrastructure like say, easy availability of broadband connections to have an online SCM that is fast & cost effective, but over everything else, more probable to succeed. A ROI calculation on even such a system may not hurt. The management can quantify the financial risk involved & based on other data may or may not go ahead with the system. Here the prime concern is not about positive ROI figures but making informed decisions. A client-server technology may win the ROI number war over a web based application, but when future integration issues are taken into account, the web based application may get the nod, even if there is no existing way at that point of time to find out the tune of cost savings in the future. ROI calculations are best done in-house. The number of processes that will be automated by the system, the number of people that will need to be trained or the amount of time saved by using the system can be best determined by the company itself. Software vendors cannot be expected to be experts on calculating ROI, nor are they experts in mapping your business processes. However, vendors can provide industry benchmarks & average improvements in certain process efficiencies due to the use of their software. The SLAs should include these ROI metrics & provisions on the course of action if these deliverables are not met. The metrics should be reassessed every six months with a goal of achieving positive ROI in not more than 18 months, if the application is web based. For your company, finding out various inputs that go into the calculation of ROI can be an eye opener in itself. Information like the measure of resources that go into a particular process in terms of time & money can help quantifiably define benchmarks for the software & even otherwise. It is imperative for the organization to have a standard ROI measuring system. It puts all systems that the organization acquired over a period of time on the same platform for analysis. One way to do this is to use a software for the purpose. Glomark's Genius System & CIOview's ROInow are popular softwares in this segment. Apart from providing with a standard for all ROI analysis, it makes it feasible for calculating ROI for smaller projects, for which normally such an effort would not be justified. These softwares have a downside though. Since the onus of calculating ROI usually falls on the vendor, they form the majority customer base for these softwares. Needless to say, the softwares are designed to be optimistic. Considering that 80% of ERP & 70% of the CRM products do not live up to their expected ROI figures, these softwares may not serve the purpose for IT users. Be pessimistic in feeding the expected benefits into the system or use a proprietary method.
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