Two ways to measure software’s potential value, the most frequently used is not so good.
We create custom software for small to medium business. Custom software is not the cheapest, in fact it usually involves a significant investment. Yet our clients have found that the investment is well worth it. So how do you evaluate the investment vs. the benefits? Frequently the first thing people think of is cost reduction. They think about automating things that people, a high cost, usually do and use the savings to justify the development. A proposed development is estimated to save 3.5% in workload so:
Cost Savings Model
- Revenue: 5,350,000
- Costs: 4,300,000
- Profitability: 1,050,000
- Software reduces costs 150,000
- New Profitability: 1,200,000
To realize these cost savings would require a staff reduction of two maybe three people which is never fun. But this easily justifies an investment of $150,000 because your payback is 12 months and after that it’s all gravy. Even if you are off in your estimate by 25% the payback is still only 18 months. Again, after that you now have $150,000 extra profit a year. This represents and increase in profit of about 14.25%
But let’s think of this a bit differently. What if you were able to automate some of the tasks that your best and brightest do today? What if their repetitive workload was decreased and they were able to do things that created new revenue from existing customers and attract new customers. Let’s say 5,350,000 represents revenue from 100 customers and you attracted 4 new customers for an increase of $214,000 and you managed to increase revenue with old customers by 5% for another increase of $267,500.
Revenue Increase Model
- Revenue: 5,350,000 + 214,000 + 267,500 = 5,831,500
- No change in Costs: 4,300,000
- Profitability: 1,531,500, increase of 481,500, or 40%
This is, of course, only a hypothetical case. Only you can know if there are bottlenecks in your systems that might result in the kind of benefits that would create these kinds of results. But your employees are your window into bottlenecks in your systems. Listen, evaluate and measure. If your employees have ideas they can’t implement because they are busy doing things that can be automated, you may be a candidate for custom software using the Revenue Increase model. We’d be happy to help you interview employees and evaluate if a custom application or hybrid custom application would make financial sense.
In summary, if you are thinking about how software can help your company, measure how it can increase sales or customer retention and only secondarily how it can lower expense. It is not the cost that counts. If I wrote you a custom program for $1000 but it didn’t add to your bottom line it would not be cheap. If I wrote you a program for $1,000,000 and it made it possible for you to earn another $5,000,000 it would be cheap. Productivity of the average worker over the last 20 years has increased enormously largely due to automation. If you have a package that needs updating or you are considering an area of your business that could be improved we offer a free evaluation.