An approach to calculating the return on investment (ROI) for software purchases
This article presents an approach to calculating the return on investment for software designed to address environmental compliance information.
Return On Investment - Introduction
Return on Investment (ROI) calculations are commonly used as a primary value point in evaluating the purchase of products and services. The ROI is usually calculated by the formula:
ROI = (Return – Cost)/Cost
An ROI calculated at a value of 1 represents a purchase that returns 100% of the investment. An ROI of < 1 has a return less than the cost. Most desirable, of course, is an ROI resulting in a value > 1, delivering benefits greater than the costs incurred
Self Generated ROI’s Are Most Reliable
In order to have a high level of confidence in an ROI calculation, companies often conduct their own ROI using financial data and estimates where necessary regarding the costs associated with the process being evaluated and the dollar benefits (return) that can be achieved. Use of ROI information from an unrelated company, even in the same industry is not usually a good business practice for a purchaser since there are variables that can affect an ROI calculation that will differ greatly between companies. Generic ROI analyses provided by vendors are also inherently difficult to apply, not only because of the variables between companies, but also because of the built in conflict issues related to the sales process.
A recent survey by Enterprise Management Associates found that only 8% of IT managers relied solely on a standard (vendor supplied) ROI for decision making on software products.