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How to Evaluate Good ROI for Custom Software Development

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18.09.2020

Colleagues calculating ROI for Custom Software Outsourcing

Implementing custom software is a very crucial and strategical step for a company regardless of the industry it operates in. Defining your tailor-made software, which is based on your specific needs, is the key to successful business management.

Business owners or CEOs aren’t just randomly making decisions, instead, they follow the initial business plan during each stage of the business lifecycle they’re in.

Evaluating return on investment (ROI) for each expenditure keeps the finances under control and makes sure that the company receives appropriate commissions and incomes rather than wasting on unnecessary outlays.

However, custom software implementation can never be considered “an unnecessary investment” as it builds the company’s uniqueness and puts a certain strategy and management into the action. The question is, to have a clear idea on which direction to follow for a successful investment.

In this article, we’ll speak about:

  • ·       The importance of tailor-made software
  • ·       The importance of evaluating ROI for custom software development
  • ·       Ways of calculating ROI for custom software implementation

Before jumping straight into these essential questions, let’s go over some tips that will help you identify whether you need custom software outsourcing. The easiest and less complicated way to make a final decision is giving answers to the following questions:

  1. Is there any work that I systematically do manually and it wastes my time?
  2. Do I gather a lot of useful data for my business but have issues to use it properly?
  3. Do I constitute rapid growth in my business?
  4. Am I concerned over managing my employees’ work and productivity?
  5. Will custom software make me more competitive in the industry?

After clarifying these questions, decide which software implementation model you prefer. Many companies prefer software outsourcing as:

  • It doesn’t require permanent developers and additional costs for space, monthly wages, taxes, etc.
  • It’s less time-consuming and more affordable.

Colleagues discussing custom software outsourcing for their business plan

Once you decide to outsource, learn some tips on finding the right software vendor. I suggest checking CodeRiders’ tips on finding the best remote IT staff. Some additional tips include:

 Geography

Developed countries with a strong and stable economy evaluate the expensive cost of living and high salaries. Thus, hiring developers is rather expensive. On the other hand, developing countries have a lower cost of living resulting in lower salaries and more affordable software services. Therefore, software outsourcing to developing countries becomes extremely beneficial.

When it comes to choosing the country, companies usually go with smaller countries with a more compact market. In this way, they determine the valuable market, make sure that the services are in high quality at affordable prices, and spend less time on orientating in the IT market and finding the appropriate vendor.

As an example, you can check Armenia, which is a developing country in Transcaucasia. The cost of living is low in this country, which ultimately results in low wages and affordable prices for software development. On the other hand, the IT sector in this country is said to be one of the most rapidly developing ones in the world. It’s especially very demanded in outsourcing because of low costs and quality work. Check out Forbes coverage about Armenia as the world’s next tech hub. We, at CodeRiders, are also based in Armenia and are concentrated on software outsourcing. We’ve been operating in the IT field since 2013, and have been working for various companies abroad.

·       Pricing and cooperation models

Outsourcing custom software services gives a big choice of market and pricing. When finding the most affordable services for you, take into consideration your business objectives and the preferred engagement models. For example, specifying your project and business goals determines your outsourcing cost because it includes A to Z software development from designers to project managers, front, back, or full-stack developers, QA specialists, etc.

On the other hand, engagement models make the billing process and overall prices more flexible. You may want to write a concrete plan and stick exactly to it and pay your software vendor on a project basis, or you may want to give a general view of what you want and make modifications throughout the project by paying on an hourly basis, etc. Having technical documentation (TD) in hand highly facilitates your cooperation, so, it’s very advisable to have one. If you have a vague picture of TD, I suggest checking CodeRiders’ article on tips for writing a candid Technical Requirement List.

Managed workflows

You’ll get rid of the following daily activities if you decide to outsource your custom software development:

·   Bug fixing and handling support issues

·   Upgrades and adjustments

·   System troubleshooting, domain names, routers, etc.

Now, as you’re certain on outsourcing custom software, start evaluating ROI. The words “evaluate” or “calculate” may be taken too seriously by some business owners or CEOs. You may think that a thorough analysis and a lot of time is required. However, the following simple steps will make this process less complex and messy. There is no defined formula to evaluate ROI for custom software outsourcing. So, in this article, I’ll speak about the 3-step fast and easy methods to consider for evaluating and measuring ROI for custom software outsourcing.

Successful business plan includes ROI measurement for custom software outsourcing

1. The Type of the Software

Custom software development isn’t a straightforward work, so it’s ROI isn’t definite as well. As mentioned earlier, at the beginning of the project, you should define the type of software that is necessary for the growth of your company. However, this doesn’t have an impact on your custom software ROI prediction at first hand. The ROI will be different regarding the type of software you choose, so below, we’ll go over some software options separately.

Commercial software

The primary focus of this software is to push sales. The measurement of this software is connected directly with the increase in sales. Thus, while determining the ROI for commercial software, thorough market research is required. You should also pay attention to the customer retention rate. The positive ROI for commercial software outsourcing should include:

·  Successful customer support

·  High customer engagement rate

·  A high flow of leads with a high conversion rate

·  Increasing sales pipeline

Business management software

This software is for increasing the work productivity and communication of your employees. The positive impact of this software should be:

·  Significant time-reduction spent on everyday manual tasks and work efficiency

·  An increasing percentage of sales and conversion rate

·  The improvement of maintenance and the ability to consolidate inventory and resources

·  Increase of valuable extra data and decrease of unnecessary information

Learning Management Software (LMS)

Learning management systems are mostly used by Education management or E-learning companies. However, companies that substantialize the employees’ professional improvement often implement customized LMSs as well.

The main purpose of LMS is to successfully manage and facilitate the time spent on manual activities that hinder the learning process. To learn more about the wide range of opportunities by this software, I suggest checking CodeRiders’ article on EdTech Solutions. The article is based on CodeRiders’ experience in working with companies in the Education management industry.

Construction Management Software

As the name tells itself, this software is built specifically for construction companies. However, I decided to include this one as well, because companies in the construction industry sometimes skip even the identification process of custom software. Indeed, it plays a major role in human resources management, organizing productive work, and successful communication between employees. Construction companies have both in-house and outdoor employees. So, miscommunication issues are pain-points for such companies. Construction software is an ideal solution for keeping track and communicating with outdoor employees, which include engineers, constructors, drivers, etc. In-house employees benefit in quick and “paperless” documentation. To learn more, I suggest a quick consultation with a CodeRiders’ representative.

An employee builds a business plan for a better ROI in custom software outsourcing

2. ROI Calculation for Software Outsourcing

As mentioned earlier, there are no certain criteria for measuring ROI, thus there are many ways to quantify it. However, the easiest and fastest way to evaluate the ROI for software outsourcing is to calculate the ratio of the present value (PV) of the presumed profits over the PV of the expected costs. So, the basic calculation of the percentage of the ROI for custom software outsourcing will look like this:

ROI =  (PV of expected profits/PV of expected costs) / *100

Other popular types of calculations are:

  • ·       Internal Rate of Return (IRR) which is the yearly percentage of the ROI
  • ·       Payback which is the number of years it takes to pay off the investment

This, of course, has a subjective approach and highly depends on the business plan and expectations drawn by a specific company. However, there are some general points for most of the cases.  If the project has more than 100% ROI, it’s more likely to get further funding. Projects that show less than 100% of ROI are re-considered for a new business plan.

3. Other Things to Consider

Besides calculating and analyzing the ROI for your custom software, it’s also very important to pay attention to the following factors:

·  Competitive advantage – Technical innovations refresh the employees’ daily routine as well as keep their customers interested. Customer engagement and motivated employees are key factors for the company’s ultimate success.

·  Productivity – Custom software solutions are supposed to refine employee engagement rates and cover all the specific business needs that aren’t being fulfilled by public software.

·  Wise time management- Custom software should cut off additional time spent on unnecessary daily manual activities. This ultimately brings flexibility and the ability to evolve with time.

·  Free of monthly or annual fees for public software – Having your custom software frees you from monthly and annual fees, licenses, or similar requirements by public software. Instead, you enjoy your own software, pay once, and own it for permanent use.  

To sum up, evaluating ROI for custom software outsourcing is extremely crucial for any business. It helps companies stay organized, have balanced finances, and specific, pre-written business plans. Successful companies follow tips, formulas, or their own company strategy before making an important decision. The right custom software implementation at the right time can shift your business to the next level and bring a considerate flow of customers, increase sales, regulate internal working routine, and have a huge impact on your company’s further development and reputation. 

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