For years, companies have used return on investment (ROI) to validate their purchase decisions for enterprise resource planning, engineering, and CRM software. In this article, we use real cloud software as an example. Let’s see how the calculation works:

“By the Book” calculation:

ROI measures the rate of return on an investment relative to the cost of the investment.

Simple ROI = (return on investment-investment cost) / (investment cost)

To calculate ROI, you need to calculate both costs and savings. But how do you attribute the dollar numbers to time, productivity, greater market insights, or their value in identifying high-income generators?

Example of 5 years ROI

The services business runs benchmarks to document business processes, compliance costs, and performance with benchmarks such as “cost of delivering high-quality services/products” and “use of technology.” This gives you the following “fictitious” results:

  • You have many different systems to run your business.
  • Many of the processes for managing quality, efficiency, and customer-oriented systems are manual.
  • Year-end and end-of-month closings are time-consuming and often inaccurate.
  • Many of the processes are managed by a third-party Access database or software.

Estimate: Cost of software

Year 1:150.000 euros
Year 2 to 5:40.000 euros per year
5 year cost:310.000 euro

Estimate: Savings

  • Technical hardware savings
  • Worker time
  • Compliance
  • Accelerated billing
  • Invoice errors
  • Theft / Scam
  • Inventory write-offs
  • New market/customer
  • Reuse of software costs
  • Staff change
  • Reduction of staff turnover
5 year profit (savings):500.000 euros

ROI calculation = 500.000 euros (savings)- 310.000 euros (cost) = 190.000 euros divided by 310.000 euros (cost) = 61.2% or 12.2% per year.

Your business has a good idea of the savings you can expect over the next five years and how it will affect your business as a whole and its competitiveness. This benefit can be compared to other investments under consideration.

Now we will add some real-life examples to evaluate each component on both, cost & savings sides.

Cost side calculation factors

We got the figures for the cost of software, support, training, and implementation for the first year, and also the cost for the following years (both software and support). Is this really an estimate of the total cost? No.

The biggest intangible cost is called “scope creep”. This is defined as an increase in the work initially specified. Understanding this is very important and can be minimized or eliminated by understanding how it happens from both the provider and staff:

Company side:

As the final Business Requirements Document (BRD) is compiled with the provider, staff, and managers may be tempted to add features that were not originally decided. This can be avoided by carefully assessing what department, functions, or problems you are trying to resolve before proceeding to the project setup stage. A good provider will always be happy to help you with this. You can also seek an outside opinion from trusted and knowledgeable sources. Set up clear documentation about your business requirements before looking at the software demo.

Provider side:

Sellers who choose to compete for your business need to make a choice. How much free time do they give this opportunity before moving on to a paid commitment? A complete discovery by the provider should allow them to give you an accurate proposal. On the other hand, quick proposals by inexperienced staff who do not have the proper process, and/or proposals done with their eye on the clock can result in “scope creep” that kills the project. The downside of being late to discover this is that you are already spending a lot of resources and money and it may be too late to go back. Choose your provider wisely and adopt a faster process.

Savings side calculation

a. Tech hardware savings
Consists of removing all your servers and related

b. Repurposed software costs
Total cost for the current software – cost paid for the new solution

c. Staff time
Savings in opening up some time for the current workers. The time can be invested to increasing efficiency, customer retention, marketing, or customer experience innovation, and more.

d. Expedited billing
To edit and close a work order in the field, combined with adequate approval of workflow speeds up the billing process for a day or even months.

e. Billing errors
The greatest consequence of inaccurate billing is the time you waste in research, correction, and retransmission. It is also difficult to quantify, but crucial if you want to grow.

f. Inventory write-offs, theft, and fraud
All of this can have a significant impact on the profit. It is hard to fix what you cant see.

g. Compliance
Usually sent to the bottom of the list, unless you are one of those companies that are regularly audited. If you want to avoid the problem of not being compliant, automate your compliance!

h. Bottom line growth through staff
Reduction of staff rotation.
– Staff reduction and/or higher productivity.

i. New markets / clients
The appropriate software solution allows you to add workflows and the functionality of the business process to enter new markets. But many software applications cannot add complex workflows or business process areas due to a narrow focus, so try to find one that is more flexible and has a broader specter of functionalities.

j. Identifying trends
The visibility into the business, provided by an adequate software solution is invaluable. Seeing things as they are occurring and properly reacting to them is vital. The right software solution, professionally implemented, can give you decision-making data that saves money and increases revenue.

k. Customer experience
The appropriate software solution allows your company to provide a true customer experience, resulting in repetitive service and higher revenue. These software features typically include:
– Taking payments in the field,
– Providing customer’s order history in the field,
– Providing the equipment maintenance history in the field,
– Automated job completion notification emails,
– Automated customer satisfaction surveys,
– And more…

All things considered, we can see that the return on investment (ROI) is difficult to calculate, but exercise will reduce many problems that prevent its growth.  Choosing your software provider carefully can have an enormous positive impact on your future ROI.