For years, companies have used Return on Investment (ROI) to validate purchasing decisions for ERP Software, Engineering Software, CRM Software, and more. In this article, I will use True-Cloud software as my example, meaning a solution built in the cloud instead of Client-Server solutions hosted in private data centers or installed locally as on-premise software.
The “By the Book” Answer:
ROI measures the amount of return on an investment relative to the investment’s cost.
Simple ROI = (Gain from Investment – Cost of Investment) / (Cost of Investment)
The Real Answer:
Calculating ROI requires you to quantify both Savings and Cost intangibles. How do you assign a dollar figure to time or productivity, increased market vision, or the value of identifying high revenue/profit drivers?
5-Year ROI Example
Calculating ROI for Field Service Software
Your service company does a benchmarking exercise to document its business processes, cost of compliance, and performance in metrics such as ‘the cost of providing quality service/products’ and ‘use of technology.’ It produces the following hypothetical results (these are not random but taken from hundreds of our clients’ evaluations of their business):
- You have many disparate systems for managing the business.
- Many processes to manage the quality, efficiency, and customer-facing systems are manual.
- Month-end and year-end closings are very time-consuming and often inaccurate.
- Many of the processes are managed through external databases or third-party software.
Estimate – Cost of Software and Implementation
- 1st year – $ 25,000
- 2nd through 5th year – $ 15,000 per year
5-year Cost = $ 85,000
Estimate – Savings
- Technology hardware savings
- Staff time
- Compliance
- Expedited Billing
- Billing Errors / Shortfall
- Theft / Fraud
- Inventory Write-Offs
- New Markets / Customers
- Repurposed software costs
- Staff Changes
- Reduction in staff turnover
5-year Profit (Savings) = $ 140,000
ROI calculation = $ 140,000 (Savings) – $ 85,000 (Cost) = $ 55,000 divided by $ 85,000 (Cost) = 64.7% or 12.9% per year.
Your company has a good idea of the savings you can expect over the next five years and how it will impact the broader company and your competitive positioning. This benefit can be compared to other investments under consideration.
Now, let’s read between the lines and give real-world examples to quantify the individual components above, both on the cost and savings sides.
Cost Side Calculation Factors
You’ve obtained figures for the cost of the software, support, training, and implementation for the first year, and you also have the cost of the subsequent years (for both software and support). Is this the entirety of the Cost calculation? No.
The highest potential intangible cost is what we call “Scope Creep.” This is defined as an increase in the work that was initially specified. This is very important to understand and can be minimized or eliminated by understanding how it happens, both from your vendor and your staff.
Your Company
As you progress through creating a final Requirements Document with your vendor, your staff and management may be tempted to add features not initially in scope, encouraged by the knowledge of what software features are available to you and the advantages these features bring. This can be avoided by thoroughly evaluating what departments, functions, or problems you are trying to address before you get into the configuration stage of the project. A good vendor will always be willing to help you with this exercise, and you can also solicit outside opinions from trusted and knowledgeable sources. Could you produce a clear Requirements Document before looking at software demonstrations?
Your Vendor
There is an adage that goes, “You are better off with the wrong software and the right vendor than the reverse.” Sentrien will encourage you to shoot for both, but the message that this adage is attempting to impart is very valid.
The vendors you choose to compete for your business have a decision to make. How much free time do they “donate” to this opportunity before transitioning to a paid engagement? A thorough discovery done by the vendor (the expert) should allow them to provide you with an accurate proposal. On the other hand, a quick proposal done by inexperienced personnel without proper process, and one done with their eye on the clock, is liable to end up in project-killing “Scope Creep.” The downside of discovering this too late is that you have already expended many resources and money, and it may be too late to back out. Choose your vendor wisely and embrace process over speed.
Savings Side Calculation
Technology hardware savings
Technology savings include eliminating data servers and the related hardware (excluding your hardware needed for internet access.) Remember to figure out both current and future needs.
Repurposed software costs
These would consist of the total you are currently paying for software your new solution will replace.
Staff time
The biggest mistake we encounter is the attitude that if someone is a salaried employee and they are currently getting their work done (however painful it may be for them), then there are no savings by opening up time in their day/week. This needs to be corrected on several points. Your staff has been working in your industry and has learned. If they can contribute to efficiency, customer retention, marketing, or customer experience innovation, you will experience significant savings, albeit hard to quantify. If you can retain or gain just one customer by improving your quality of product service delivery, then that figure should be calculated as a savings.
You also greatly enhance the work experience and, consequently, the loyalty of your employees when they are engaged in assisting in growth or efficiency initiatives. Their previous absence in this process due to time constraints of inefficient software doesn’t mean they can’t help your company grow in the future when they have more time to devote to additional tasks. Who is better than the skilled people you already have on the front lines to make suggestions and take on new projects, and who already know your company and can communicate your value to your customers?
Expedited Billing
This is the first benefit noticed by a customer who has automated through software but may need help quantifying it. Editing and closing a work order in the field and proper approval workflow reduce billing delays by days/weeks and sometimes even months.
Billing Errors / Shortfall
Our field service clients report a significant problem with billing errors. A technician may perform a service in the field and forget to add it to the work order, causing money to be lost. The most significant consequence of inaccurate billing is time spent on staff investigation, correction, and retransmission. This is also hard to quantify but vitally crucial if you want to grow.
Inventory Write-Offs – Theft – Fraud
Whether it is inventory, employee submission of job time, or accounting errors, this can significantly impact profit figures. We have seen inventory discrepancies in the hundreds of thousands of dollars and employee job time submission errors. However, don’t overlook the lack of automation in accounting/finance procedures and reporting. One recent client took a significant write-off for under-assigned depreciation because his system calculated this manually and had no checks in place. You can’t fix what you don’t see.
Compliance
Compliance issues sometimes get sent to the bottom of the list unless your company is subjected to regular audits. Not all companies undergo regular audits for compliance: most private companies are not always familiar with audit-compliant reporting and how that can find inaccuracies that translate into lost profits. Often, a company only understands this exposure after being unfavorably audited.
Bottom Line Growth through Staff
Reduction in Staff Turnover
Staff turnover can be a revenue killer. Employees are your number one asset – training new employees can drain productivity and morale, not to mention the increased cost.
Do your employees have a system that:
- Automates their duties and provides data they can trust
- Eliminates the need for multiple spreadsheets or third-party software in the performance of their duties, including the ability to create accurate and timely reports
- Automates and simplifies month-end and year-end close
- Allows them to respond to customer and vendor inquiries quickly and accurately
- Doesn’t create frustration and anxiety in the performance of their daily, monthly, and yearly tasks
- Allows them time to make contributions/suggestions that aid in company growth or efficiency
Staff Reduction and Increased Productivity
Cloud-based software, together with proper automation, can cut staffing requirements. Although staff reduction. It can be a touchy subject for some to read; proportion can help pay for itself by eliminating redundant tasks and the technical personnel needed to maintain in-house servers. The consolidation of accounting positions may also be achieved. However, the significant cost benefit of adopting the correct cloud software solution is the ability to grow, adding more customers/transactions with the same staff. You’ll be able to scale your business upward without needing additional staff. We see this as a significant but often overlooked part of your ROI.
New Markets / Customers
The proper software solution can allow you to add additional workflows and business process functionality, allowing you to enter new markets, a great example being the addition of construction project work. Many Facilities Maintenance companies already perform such work, and Apartment Turnover and HVAC/Plumbing/Electrical companies are rapidly moving into this area.
It takes a different software solution to handle long-term project work than the shorter work-order oriented applications. Many companies purchase an additional software application to address this area, and then they must find a way to integrate it into other applications. The right software solution can do both, and you can configure these business areas in phases if desired. Due to a narrow focus, many software applications today need help adding complex workflows or business process areas.
Identifying Trends
The visibility into your business that a proper software solution provides decision-makers is invaluable.
It is vital to see things as they are happening versus reacting well after changes in your business show up on reports. Companies, large and small, are acquiring this revenue-driving capability through software. Role-based software utilizing customizable dashboards with real-time data is just the tip of the iceberg. The right software solution, professionally implemented, can give you decision-making data that saves money and increases revenue.
Basic Example:
We have a client whose number one customer provided them with significant growth. Our client’s Operations Director discovered that they had lost all of the Punch-Out business for this customer and had failed to offer such services for two years. Total billings for their number one customer had increased only because the number of apartment turnovers had increased dramatically, thereby hiding the loss of an entire service category. The territory manager had either not noticed or failed to disclose the loss. The loss of business accounted for nearly $50,000.00, but more importantly, it jeopardized their pursuit of renovation/cap-ex business. The holder of the Punch-Out contract is better positioned than others to be awarded additional Cap-Ex work. This example may be overly simplistic, but there are many more that we could discuss.
CFO/CEO Question: From your dashboard, can you identify each department’s sales for a given month AND drill down to the transaction level for any transaction that derives that monthly number? Without getting out of your dashboard and opening new reports?
Customer Experience
Once a phrase used only in the restaurant or casino industry, this phrase has never been more applicable than today in the service industry. The proper software solution can equip your company with the tools to provide an authentic customer experience with positive online reviews, repeat business, and upsells. These software features vary by service industry, such as Facilities Maintenance, Industrial Machinery, Renovation / Construction, and HVAC, to illustrate just a few examples. These industries and others typically include:
- Taking payments in the field
- Providing customer order history in the field
- Providing equipment maintenance history in the field
- Displaying equipment or service information to customers in the field, including pictures
- Customer portals
- Automated job completion notification emails
- Written customer approval signatures in the field
- Automated updates to all customers announcing specials, upcoming maintenance schedules, and customer appreciation communications
- Automated customer satisfaction surveys
- On-demand and periodic review of customer activity with the customer
This is just the beginning of the customer-facing improvements available in today’s software solutions.
Summary
As you can see, Return on Investment (ROI) is difficult to calculate, but the exercise will unearth many issues preventing your growth. Service companies are moving to new solutions to compete, but are they choosing the right solution, or will they repeat this exercise in a few short years? Doing your homework and choosing your vendor wisely can significantly impact your ROI.