Value Justification

When you buy a new piece of software or hire a software development team to write custom software for your organization, there is an important question you should ask…

How long will it take until the new system pays for itself?

Value Justification 101

What is the cost?

If the answer is that it might not ever pay for itself, then are you being responsible to your organization in making the purchase decision? After all, don’t you have expenses for payroll, federal employment tax, medicare, state unemployment taxes, facilities, staff PTO, insurance, marketing, research & development, etc. Can you afford to spend money on a system with negative ROI?

On the other hand, if you invest in a system that pays for itself in 2 or 3 quarters or a year, can you afford not to? After all, you have got bills to pay. Can you afford to leave money on the table?

Metrics

Metrics can help you make a data-driven decision. What metrics determine system value? Here are some that may or may not apply to your organization:

• Cost reduction
• Process control
• Consistent adherence to best practices
• Penalty avoidance
• Improved functionality
• Improved user experience
• Accuracy
• Productivity
• Security
• Efficiency
• Ability to win new business
• Ability to better serve existing customers
• Improved decision making based on better access to data
• Ability to scale teams
• Collection of tribal knowledge
• Reliability
• etc.

The culture in every organization is different. What metrics does your organization value? What is the financial impact?

ROI Calculation

Here’s an example of an ROI calculation:

With the new XYZ system, my company will increase profits by $10 million over the next 5 years due to the ability to win new business and from cost reduction. We will also have a better platform for process control and better data for reporting and data-driven decisions. Therefore the annual ROI for the system is $2 million. It makes the decision clearer to invest $1 million on system XYZ since it will pay for itself in the first 6 months.

Fill in the blanks:

With a new system, my organization will increase profits by $___________ over the next ____________ (time period) due to ____________ (metrics).

Therefore, the ____________ (time period) ROI for the system is $____________.