Want to really frustrate most software administrators? Ask them to calculate the ROI of a future software implementation. This notoriously complex calculation is one of those business school formulas that gets thrown around a bunch because it sounds really impressive, but is there really any way to know the potential benefits of a new software?
Turns out, it depends. Calculating the rate of error in your ROI calculations is even more complicated than figuring the actual ROI. And yet, many companies require an ROI estimate before a software purchase can happen. That’s why we’ve put together this quick and simple (as simple as possible) overview of how to calculate the ROI of your project management software purchase.
The ROI calculation
During the project management software research process, you’ll likely have 2 sets of ROI calculations: the estimated and the actual ROI. Estimate conservatively to give stakeholders a sense of what they can expect from their investment in the new software. Then go ahead and wow them with your actual ROI after your team gets up to speed on the new software.
Here’s the basic ROI formula:
ROI= (Return-Cost of implementation) / Cost of implementation
Simple, right? You’re looking at the net return divided by the cost of implementation. For our purposes and to get a better understanding of the long-term value of your project management software ROI, we’re going to use total cost of ownership (TCO) in place of cost of implementation. So:
ROI = (Return – TCO) / TCO
Usually, this number is presented as a percentage. But both Return and TCO are broad calculations, so you need some solid numbers in place to ground your ROI calculation.
Gather your metrics
Take stock and make note of key metrics that indicate how your team manages their current, pre-new-software projects. Once you purchase and get everyone going on the new software, gather data on how those metrics change. Set up a place to track these quantitative and qualitative metrics-like a data visualization tool, BI software, or in the reporting module of your PM software-as your software implementation begins.
- Revenue: Make note of revenue before and after implementation. In terms of calculating ROI for a project management purchase, you’ll want to gather revenue metrics for the company as a whole only if you’re implementing the PM software across the whole company, otherwise use departmental or team revenue metrics.
- Labor wages for time spent on each project
- Supplies: physical resources and technology investments
- Process improvements: time to complete projects, number of employees working on each project, number of steps to complete projects, repeatability. Start off with a pre-implementation baseline for each of these metrics, and collect data for those same metrics after your team uses the project management software for a little while.
Having these and other key metrics will help you calculate your actual ROI after implementation and ramp-up are complete.
Calculate the return
After implementation, subtract your pre-purchase metrics from post-purchase. This will give you your return. Immediately after purchase and onboarding, your return may be low, but if you continue to track your metrics, you should start seeing increased returns as team members learn the software and start improving their own processes.
Total cost of ownership
Your implementation has lots of key parts you’ll want to include in the ROI calculation for your new project management software. The more detailed you can make your TCO calculation, the more accurately you’ll be able to calculate your ROI.
The benefit of using TCO over cost of implementation is its accuracy-cost of implementation generally only takes into account the cost of the software plus immediate training, whereas TCO gets closer to your actual spend.
Take into account:
- Price of software
- Cost of training (materials + lost time)
- Upgrades (especially for on-premise software)
Sounds like a lot, right? Well, again, it’s the TOTAL cost of ownership. We’re looking for what the whole thing costs you after implementation.
Don’t freak out if this number is big. The hope is that with the implementation of the software and the cost savings or increased revenue you get from all your newfound organization and efficiency, you’ll actually make up the TCO pretty quickly.
Finding the best project management software
Calculating an estimated and actual ROI for your project management software is just one of several important steps in your project management software purchase. TechnologyAdvice is here to help with the best project management software reviews, recommendations, and resources to help you find your best fit software. Check out our other project management software resources, or give us a call at 877.702.2082 to get fast, free software recommendations based on your company’s requirements.