Return on Investment in Software Development

Hi I thought I would write a series of articles on a topic that I believe is becoming absolutely critical in the software development industry, that being the magical and mysterious ROI (return on investment) in software development.

As the owner of a programming company here in South Africa, I decided at the outset of the company that a rule of thumb for accepting any software development project would be that I would need to figure out how to measure the ROI in that particular project. Now you may or may not be surprised to know that in most instances my clients don’t actually think of this measure before taking on the project, they know that they have a business problem or business need that needs to be solved with technology and are willing to pay an amount of money for that. Experience over the years however has shown me that the best way to retain that client in the long term and or to make more business from that client is to prove a ROI in some way on that software development project.

I find this measure to be critical because for my companies purposes it shows exactly how successful a project is to my client in monetary terms. The bigger my impact through the software I develop, the more successful I have been at satisfying that clients need, the easier it is for me to go back to that client and offer further services. Contrary to popular belief, I don’t believe that a project coming in on time or under cost is a great measure of the success of that project at all, this is typically what IT companies do. If I really want to do a great job for my client then I always intentionally build a monitoring tool into the software I develop for them and that tool must track the ROI for the client in some way and present a report to the client whenever they want to see what this piece of software really is worth to them, be it through savings, additional income, time savings, it doesn’t matter so long as you track the value.
So how do you go about figuring out the ROI on software development project?

This is the difficult portion because it requires listening to the clients need carefully and scoping there need correctly, once you have done this, it should become fairly obvious what the client is trying to solve by having the software developed, this should then be a clear indication of the measure to be used on ROI. For example,a client of mine wished to have a system developed that automated the process of allowing shareholders in various properties to swap there owned weeks with each other. Before the client came to me they did this process manually, ie called there shareholders to find out if they were willing to exchange a week with a fellow shareholder that already gave an indication that they wanted to swap there week etc. This took a lot of time and for the administration fee that the client asked to do this, I suspect the profit was very little. Once we had developed the system and allowed the shareholders to interact with each other through the website instead of the web system, the ROI was very clear, why?

-We tracked each exchange in the system, each exchange has a monetary value associated to it.

-The clients telephone bill dropped significantly

-More swaps occur because of the ease at which shareholders can swap weeks, instead of having to go through a process of calling the company then waiting etc, this increase in sales is measurable

-Because the client offered the service electronically he could increase his administration fee.

All this information the client could get through there system thereby ensuring that he could very clearly see what his ROI was.
Conclusion

I believe without a doubt that if you truly want to complete a software development project successfully for a client, then you need to build a ROI tool into the software. Convince the client to do this, if you cant do that then build it free of charge, but make sure that you get your client to look at these figures. In the long term this will have a positive effect on your business and keeps your software development projects honest in terms of creativity and keeping the clients needs in mind constantly.

Please offer your comments and views on this topic, I am very sure that peoples opinions and views on this vary quite considerably, I am very willing to listen to other opinions in this regard.

In my next article on ROI and software, I will be describing more specifically how you can measure ROI on certain types of projects, in this case it will be how to measure ROI precisely in SMS campaigns.

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