How to Analyze ROI for a Software Upgrade

Is it time for a software upgrade? Despite a litany of potential benefits, taking the plunge with new software feels risky.

That’s understandable. Changing software is time-intensive work. Development and integration can cause workflow disruption, bugs, and stalled productivity as users learn the new system. Internal users and customers alike will experience a learning curve that can hamper critical business activities and maybe even transactions.

Add to that the hard costs of the upgrade, and questions about timelines, budgets, and benefits loom large.

But failing to take action carries risk as well. You may have needs your current software can’t meet. Outdated systems run slowly and require more money for maintenance. And they may not be able to handle new features that would upgrade your business operations.

At Worthwhile, we eliminate as many of the risks as we can. We work with Python and Django because they are flexible. That allows us to respond quickly to your software development needs so you experience as little disruption as possible. It also makes version updates run relatively smoothly, especially if you keep current.

But no matter how much planning you do, you’ll eventually come to a tipping point when it’s time for a software upgrade. The real question, after all, isn’t whether an upgrade is a good idea. It’s whether the benefits of an upgrade outweigh the risks. At what point in the life of your business will the potential for greater profitability over time exceed the initial cost of investment?

So how do you analyze return on investment (ROI) for a software upgrade?

The Nuts And Bolts: How to Calculate ROI

ROI considers the profit potential of an investment to determine whether you will come out ahead at the end of the day—or, if you look over time, when you will come out ahead. This helps you know if the investment is worth it.

To calculate ROI, divide net gain by costs:
(Gains – Costs)/Costs x 100= % ROI

Example: I spend $500 and make $750. My net gain is $250
ROI = (250/500) x 100, or 50%

The math isn’t hard, but assigning cost values to the various aspects of a software upgrade project can present problems. Not every cost is monetary, and not every benefit can be calculated in dollars and cents.

That brings us to our next step.

What Factors Contribute to Software ROI?

Software upgrade costs fall into four basic categories:

• IT and Development Costs
• Tangible Assets
• Intangible Assets
• Risk

The specifics of each category will vary based on the kind of upgrade you’re considering (CRM, ERP, web app, etc.) and the specific needs of your company.

But the basic categories remain the same, no matter what kind of upgrade you need.

Think of it as trading in your 2000 Toyota Camry for a 2017 Lexus. Even if both cars offer the same basic functionality, your decision will rest on whether the Lexus offers enough benefit to justify its cost. You might consider sticker price, frequency of breakdowns, maintenance costs, gas mileage, safety on the road, and comfort. You weigh each factor and decide which car best meets your needs in terms of functionality, cost, and improved experience.

And sometimes, you’re just tired of your old beater and you’re ready for something that will run more efficiently with fewer headaches, so you can concentrate on other issues in your life.

The same is true with your software upgrade. As you evaluate the benefits and risks, you’ll gain a clear picture of what returns you can expect on your initial investment.

Let’s take a look at each category in more detail.

IT and Development Costs

These costs include not only the software development itself, but also any anticipated outputs for training, support, and change management. These may include installation fees, hardware, integration with current systems, annual maintenance, admin and help desk personnel, formal training for current users and new hires, and ongoing support.

Thorough requirements gathering at the outset will ensure that the project doesn’t run over budget or exceed the scope you originally defined. At Worthwhile, our process includes a fixed-cost estimate and accurate timeline so you can calculate hard costs of the upgrade without worrying about going over budget.

We also focus on trying to help your business future-proof in any software we build. This means making it easier for you to make updates, manage users, and manage permissions without developer support. This is a key part of right-sizing IT costs over the long haul.

Tangible Assets

Tangible assets are the quantifiable benefits of the new software. Things that fall into this category include:

• Reduced waste
• Improved workflow
• Stronger security
• Superior production planning
• Reduced personnel needs
• More efficient customer interfaces and interactions
• Better inventory planning
• Reduced logistical costs all fall in this category.

New software should also need less maintenance and, if you plan well, it will promote network and data continuity across your entire technology stack.

Intangible Assets

Intangible assets deal with improvements to your day-to-day function that can’t be quantified. They are the elements that keep your business running smoothly and make happy customers. For example, a new ERP might improve audit and oversight compliance, reduce errors by improving methodology, and improve customer perception of your brand. That reduces customer complaints and can raise your net promoter score. Likewise, better-working software can improve overall employee morale and make your business a better place to work.

Risk

Having the right support system in place to prevent budget excesses and slow adoption timelines is a crucial element of managing risk. Remember that many potential risks of a software project (exceeding scope, lost productivity during the upgrade, workflow disruption, etc.) can be reduced or eliminated with good support.

The risks of not acting also affect your ROI. Will your old system crash? Can it scale as your company grows? Can new hires learn it quickly? Does it implement easily with mobile apps and other updated technology?

The numbers you assign to these factors will be estimates, so consider running alternative scenarios to get a broader view of the overall costs and benefits. And remember that some benefits, like employee morale and customer satisfaction, may not be easily calculated at all. But they still affect your potential for profitability.

After you’ve crunched the numbers, consider how those benefits compound year over year to evaluate long-term ROI.

5 Ways to Increase ROI for Your Next Software Upgrade

There are several steps you can take to make sure you’re getting the highest return for the investment you make on a software upgrade:

1. Perform thorough requirements documentation.

Incomplete or poorly defined requirements can cause the project to fail or not perform as anticipated. Dig deep for process and usage requirements before they cost you in scope creep.

2. Evaluate usage.

Do you know which parts of your current system you use regularly and which ones gather dust? Target the specific usage needs of your company rather than paying more to develop features you won’t use.

3. Plan for integration.

Know what other programs in your technology stack your new software will need to integrate with. This is a crucial step toward maximizing business intelligence. Consider ease of integration as either a cost or a benefit associated with the software upgrade.

4. Assess critical business strategies.

Will the time to deploy and potential workflow interruptions affect critical aspects of your business? If so, are there ways you can plan for these interruptions and prevent lost productivity? We often work with clients to time development to hit during less busy seasons of the sales cycle, to minimize business impact at times when employees are already stretched thin.

5. Evaluate end-user satisfaction.

Will the software create a positive user experience for customers? Have you developed a proactive training plan so employees feel confident with the new system? Poor end-user experience can cause morale problems in the office, so make sure you have a change management strategy in place before the launch date.

How Do You Know When to Take the Plunge?

The easy answer is that you’re ready to act when your ROI calculations exceed the cost of investment in your chosen time horizon. Of course, it’s not always that straightforward. Any successful business change will require research, executive approval, and stakeholder buy-in.

But when you have hard numbers to back up your proposal, you’ll be able to present a stronger case for an upgrade and demonstrate the long-term value to the company.

Efficient software is an asset to your business. It is the backbone that supports strong growth, higher profits, and less waste. When you consider its potential to improve employee performance, polish your brand image, and increase competitor advantage, you’ll know its time to take the plunge.

About Worthwhile Storyteller

We'll never tell you a lie, but we might tell you a success story that protects the intellectual property of our clients and partners. Our Worthwhile Storyteller is an amalgamation of all of our thoughts, experience, and expertise brought together to give you the facts about our relentless improvement in the software development space.