Calculating the Return On Investment (ROI) of an Application
Calculating the Return On Investment (ROI) of an application or service can be difficult, given the many impacts that it can have on a business and the natural complexity of processes in mature, sophisticated businesses.
ROI is an approximate measure of an investment’s (financial, project, etc.) return or profitability. For a business implementing a software solution this may be the return of employee time, reduction in waste, reduction in operational costs, etc.
As touched on above, to calculate all the consequential returns or savings from software would be challenging. However, for the purposes of developing a business case, or reviewing the investment after a period of operations we can implement a simplified ROI model.
A simple calculation for ROI can be achieved as follows:
Below we will explore a working example of calculating the ROI for X3CloudDocs.
X3Cloud Docs is a SaaS solution, based on tiers of documents. It is an ‘efficiency solution’, with the objective of saving human time in the process of invoice entry.
- There is no infrastructure investment (servers etc.), costs are limited to software and services.
- Calculation of cost per document is possible for both the software and estimated cost of human time.
- The ROI will be the value of the employee time saved by using software.
- Customer ‘X’ processes approx. 1000 invoices per month.
- An average AP clerk can process approx. 4-5 invoices per hour.
- An average AP clerk will earn approx. £11/hour.
- Salary uplift for National Insurance, pension, etc. will be conservatively estimated at 15%.
- The invoices are being processes by an Accounts Payable (AP) clerk, not the Financial Controller (a more costly resource).
- The manual process can be entirely automated, replacing manual intervention.
Cost of X3CoudDocs: (£1.00 [per document fee] x 1000 [documents] + £50 [platform fee]) = £1,050
Cost of Human-Time: (1000 [Documents] * (£12.65 [Salary] / 5 [docs per hour]) = £2,530
((Monthly Saving: £2,530 – £1,050 = £1,480) / (Cost: £1,050)) * 100 = ~141% ROI
For the AP Clerk’s time alone, there is a calculated ROI of 141%. This is based upon an optimal scenario of 5 invoices per hour, with no additional business time required for authorisation, waiting, printing, etc.
- If the AP Clerk can only process 4 per hour the ROI becomes 201%.
- If the AP Clerk can only process 4 per hour and the time taken for other individuals’ activities increases the cost by 10% the ROI becomes 231%.
Practically, it is reasonable to assume that all situations will not be optimal, and that there will be other costs associated with the processing of an invoice, be it time or materials. It is also reasonable to assume that the process will not become entirely automated, but rather a business may reasonably seek to automate between 60% & 80% of the Accounts Payable invoice process.
In a more real world scenario it is, therefore, reasonable to estimate an ROI which incorporates a ‘business uplift’ and an ‘automation limitation’ – probably netting off at around 120-160% ROI, which would be a significant Return on Investment.