This article is part 7 of an 8-part series on evaluating the best CPM tools for your business. Part 7 focuses on methods for calculating ROI to find the best CPM software applications.
A business software selection process can be exhausting, involving weeks or months of product demonstrations, meetings, vendor scoring, and other time-consuming tasks. Usually, the most attention is paid to the product demos. However, one of the most important but ignored areas of a vendor evaluation is a Return on Investment (ROI) estimate.
As the name implies, an ROI calculation aims at estimating the return the company is expecting to get over time based on the investment they put into the software subscription, training, and implementation.
A best practice to select the best CPM software and vendor is to perform an ROI calculation and make it part of the total vendor score as you compare the finalist candidates with each other. Here is a free interactive vendor comparison tool that has three dashboard pages:
- Scoring of 8 major functionality areas (insert screenshot below this section)
- Calculator to arrive at ROI
- Summary dashboard comparing your top two CPM software finalists
Your team can use the sliders to adjust all scores according to your evaluation results:
Why should ROI always be used when you evaluate business software?
Many companies skip or miss the ROI step in their evaluation process to compare the top CPM vendors on their finalist scorecard. Why are so many organizations missing this ROI step? Usually it is due to one or more of these reasons:
- They don’t have an ROI calculator
- They feel there are too many variables to come up with a good ROI estimate
- They have a bias toward a solution known or recommended to them
- The vendor in the lead does not want to be compared to the runner-up competitor
However, because the vendors’ CPM features and prices both change over time, a good ROI estimate helps capture this to provide a picture of what business benefits would look like compared to the investment in subscriptions and implementation services.
How to calculate ROI for the best CPM software selection
It is almost always easy to get software costs and implementation estimates from the vendor because these are already part of standard price lists and quoting tools they use in their sales processes. However, what is harder is to calculate your own costs and savings related to the project.
It is important to do your own homework first by listing and quantifying ($$) the pains of NOT having the new solution. Many organizations do list current pains before approving a new software purchase. Such metrics are also valuable after the project implementation in order to validate the degree of success. It also helps keep vendors and internal project members accountable for promises of outcomes, and keeps them focused on what is most important when there are obstacles in the implementation and to help support hard choices that have to be made.
Here is a list of the typical ingredients in an ROI calculation:
This part of an ROI calculation is always the hardest to estimate. Here is where you quantify the annual value (amount) your business expects to gain from the improved and speedier decisions you expect to achieve from the CPM vendors you evaluate. Try to put a number on the resulting benefit to the business when managers can make faster and better decisions because the new solution provides self-service access, drilldown to answer questions, charting for better analysis, more accurate budgets, and other advantages.
Note: Don’t include any costs or time savings from the cost section (see below).
Here is where you capture the costs of the new and old solutions. Your numbers should include software, hardware, and labor expenses.
Cost of New Solution:
- Annual software subscription
- One-time implementation services
Cost of Old Solution:
- IT costs to operate: This includes any server hardware and electricity, upgrade costs, annual maintenance/renewal costs, etc.
- Cost of manual labor: This should be the excess time your IT and finance staff spends compared to what you expect from the new solution. Use a fully loaded hourly cost of own and/or contractor staff.
- Cost of risk: This is where you capture the estimated annual cost of risks like errors in monthly reports, and the resulting cost of managers not having access to timely and detailed information.
If you leave all the figures in the ROI calculation as positive numbers, then the calculation can look like this: (Cost of Old Solution – Cost of New Solution + Benefit of New Solution) / Cost of Old Solution
Using one year or multiple years in your ROI calculation
Although there may be some firms that provide industry benchmarks to quantify the standard ROI of a new CPM software solution and its expected automation of financial reporting and planning processes, results can be highly individual based on how good or bad the old solution was and how well the new solution is implemented and utilized.
In very special cases, you may achieve a positive ROI in year 1, but in most cases it will take longer. For this reason, a good rule of thumb is to calculate both the 1st year and the 5-year (accumulated) ROI. This will also better capture discounts that vendors provide for one or more years before their price resets to list price.
Also, when you ask for the 5-year subscription cost from each vendor, make sure it includes annual price increases.
Do ROI calculations have an extra cost?
All decision makers like to see ROI calculations when staff members propose investments in new technologies. Sometimes, these calculations can be the major deciding factor in a decision if all other areas are somewhat equal. In other words, it may be well worth the hours it takes to come up with the estimates for ROI.
If you are using a professional software selection firm or third-party consultant to help with your selection, make sure to ask if their services include assistance with an ROI calculation or if this a separate cost.
You can use this vendor comparison tool, which includes an ROI calculator. It has three tabs: 1) Feature comparison, 2) ROI comparison, and 3) Summary score. You can use it as-is, or it may give you some ideas if you want to apply it, for example, to an Excel spreadsheet model that calculates ROI in a different way.
The best CPM software solutions have a lot of features and functionality. They are also very flexible. This means that implementation estimates can vary greatly based on the number of your reports or the complexity of your budget and forecast models.
Assuming you have a successful implementation, it is typical to stay with a solution for five to ten years or more. In such time periods, and if you choose a stable vendor, you can expect to see numerous improvements along the way that should further support your managers in making faster and better decisions. This future expected value can be captured in your multi-year ROI calculation to help ensure that you are making the best possible decision to pick the top CPM vendor for your organization to partner with.
Links to useful software research and evaluation assets