ROI for Enterprise Software

What is ROI for enterprise software?

The traditional definition of ROI for enterprise software is the ratio of costs to savings for an investment, and it’s usually expressed over a period of time.  For example, if a very large company database slows down productivity for 100 employees 5 minutes 10 times a day, and the company then spends $50K to make that database zippy fast, ROI is how much time it will take for the company to get back in increased employee productivity the $50K it just spent.

To calculate ROI, add up all costs to acquire and own the new solution. Then, figure out the expected savings and/or incremental revenue the new solution will help deliver. Consider increased employee productivity, reduced maintenance costs, faster time to market, increased sales, improved brand reputation, etc.  Divide costs by savings to get a number that will tell you how much time it will take to recover the cost of the investment.

That’s traditional ROI for enterprise software. There is also game-changing ROI, where a solution is so fundamental to the business’ growth, survival, reputation or entry into a new market segment, that ROI is no longer just financial, it’s strategic.

There is no right or wrong ROI. Some situations require a very quick return in a matter of months; others can wait years. Some company cultures require a very detailed ROI financial analysis; others don’t go through the exercise at all. Many organizations only take on projects whose value is strategically obvious. What all ROI discussions do share, however, is a fundamental business problem or opportunity that is worth the time, expense and disruption to make the change.

ROI is different from TCO

Total Cost of Ownership (TCO) is the cost side of the ROI equation. It looks at every cost associated with switching to a new enterprise solution over a period of time. The time frame can be its anticipated useful life or until a relatively steady state is achieved.

A good TCO analysis has tremendous value as a communications instrument for project financial planning by informing financial gate-keepers of the anticipated financial commitments over the project lifecycle. Whether or not an ROI analysis is planned, TCO analysis becomes an imperative if budget and project cost estimates are not in alignment, or if integrator services are necessary. And since a TCO analysis shows costs over time, it also serves to demonstrate that the project has been thought out.

IT projects are notorious for very significant cost overruns, and asking for money time and again is one sure way to get a project cut before full benefits are realized. A well built TCO analysis is one of the three strategic components that can mitigate financial IT project risk.

How is ROI used?

While TCO shows decision-makers total project cost over a period of time, ROI analysis shows them when they can expect to start getting their money back on the investment. For many companies, it’s also a yardstick for measuring IT project success, based on whether the anticipated ROI is achieved as projected. Controversial? You bet. Smart companies are realizing that ROI, budget and schedule success don’t guarantee project success. Fundamental impact on the business does.

Where is the ROI for enterprise software?

The days of traditional enterprise implementations are disappearing fast for many organizations. For decades, enterprise software vendors held all the power as companies paid enormous sums of money up front for hardware, software licenses and integrator services, before getting to assess whether the solution would deliver as promised. Software as a Service, or SaaS, turns this model upside down, with a pay-as-you-go subscription model that returns the power back to the buyer. SaaS isn’t a good fit for every business and does have limitations, but if it’s right for your organization, it can have a terrific ROI, with very little up-front cost, substantially reduced overall cost, and with far lower risk.

So where’s the ROI for enterprise software?

• Choose SaaS over a traditional enterprise implementation when it makes business sense.

• 70% of IT projects fail or fail to meet expectations because of lack of synergy between the technology and the business processes it’s intended to make more efficient. Before you choose technology, decide whether you’re targeting business processes as they stand today, or plan to reengineer. Then work through the business processes before you shop so that you know what you expect the technology to do. The last thing you want is to purchase technology today to automate business processes you plan to reengineer “some day.”

• Focus on your operational sweet spot. Your sweet spot is your most frequently performed tasks, in their most frequently repeated sequence. Many enterprise solutions can perform isolated tasks very well; synergy occurs when sequential navigation from one frequently repeated task to the next is a breeze. Find the application that can deliver real efficiency gains in this sweet spot, and you’ll be delivering your ROI. Learn from delivering to your operational sweet spot before you seek to improve ancillary business processes. Think small, focused and iteratively.

• Limit customizations and integrations to what really matters. Productivity gains are to be found at the hand-off points from one enterprise application to the next. Think data transfers, easy access to email and Internet, and customizing naming conventions and fields to fit your business. If you find yourself facing fundamental changes to the application in order to fit your business processes, then it’s time to reconsider your strategy. Fundamental changes to the software are not only expensive, but they can be complex, labor-intensive and very expensive to upgrade later.

• Positive ROI also comes out of win-win relationships with your vendor and integrator. You cannot smoke their margins to smithereens and expect them to deliver extraordinary service. A successful relationship is based on perceived value by both parties.

 

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