ROI for your custom software development

If you have a software development project on the horizon, you will also be faced with calculating the Return on Investment (ROI) of custom software development vs. an off-the-shelf product.

Calculating the ROI of a custom software project involves assessing the financial costs associated with the project. It requires you to weigh the pros and cons based on the project.

Here at Valudio, we know just how important it is for a business to evaluate these decisions. Custom software development can be pivotal to your business's growth, but we also appreciate the need to consider the ROI at every step. At a time when every penny counts, reducing costs and increasing revenue is vital.

Let us help shed some light on calculating the ROI of custom software projects. We’ll help clear up any questions that might be on your mind and set you on a path to the best software development solutions for you and your business.

What is ROI, and why is it important in software projects?

Working out the ROI or Return on Investment on an upcoming business project is vital. ROI is a calculation used to measure the financial return of an investment against the asset cost. It allows you to determine whether a particular investment, project, or such is worth the expenditure.

Assessing the ROI against custom software development and an off-the-shelf solution is crucial regarding software investments. Knowing the benefits of custom software solutions and a standard alternative and vice versa will help you tailor your decision around the upcoming potential investment.

Benefits of custom software development

Let’s look at the benefits of custom software development vs. a typical stand-alone software solution.

What is the ROI of custom software development compared to using off-the-shelf solutions?

Unsurprisingly, the upfront cost of an off-the-shelf software solution will typically be cheaper than a custom software development service. As well as this, it will likely have a more immediate implementation time. More affordable and faster, however, is only sometimes a winning combination.  Yes, custom software can initially be pricier, but it is important to note that these costs can easily balance themselves out. For example, you don't have recurring licensing fees with off-the-shelf packages.

A custom solution may incur frequent costs as you enhance or fine-tune the project. But you must remember that many off-the-shelf software platforms will come with limitations and satisfy only some of your digital needs. Therefore, there will always be further outlay until you have a solution that caters to your unique requirements.

For example, as Mischa Herbrand, CEO at Valudio, explains: 

A standard off-the-shelf software solution may be the ideal fix for your needs ‘right now’, but the downside is that they are not future-proof. Custom software development allows you to adapt your digital platform to your business needs. This will help increase efficiency, productivity, and profits, leading to a higher ROI.

What are some common benefits of custom software development that can be measured in terms of ROI?

Many benefits of using a custom software development solution are easily measurable regarding your ROI. We’ve detailed some of the most common benefits below.

Increased productivity/cost reduction

Your custom software will help to automate many of your business processes. Processes that would take staff members valuable time will be reduced, increasing efficiency and decreasing associated costs.

Creation of new income streams and digital services that generate additional revenue

Whether it’s an app or a new platform for online sales, your bespoke software can be responsible for obtaining new channels of income. 

Decrease in errors that could cause additional costs

A custom software package will reduce errors that can occur when done manually. Rectifying mistakes can be costly, so having an automated system is invaluable.

Increased customer satisfaction/service and loyalty

When building your custom software, your customer's journey will always be at the forefront of our minds. Your new development will be tailored to meet their needs. Happy customers = repeat business.

Increased employee satisfaction and retention

Having software solutions that eliminate repetitive, error-prone work helps to boost staff morale. It allows internal workflows to become more streamlined and leaves staff members more time to work on tasks that add value.

Ensure compliance with specific industry norms

Let your custom-built software take the stress out of industry compliance regulations.

Fight skilled worker shortage by optimizing processes and workflows

Finding highly skilled workers can often take time and effort. Custom software development can streamline processes enough to eliminate the need for many workers, saving you money on staff costs.

Scalability

Finally, scalability is one of great importance. Your custom software will be built to grow as your business grows. This will help avoid the need for costly upgrades or even replacements.

Unleashing Unforeseen Potential

Regularly, customers start with a single solution in mind. However, once the software is implemented and their work methods are adjusted accordingly, they frequently discover additional opportunities to enhance specific processes, revealing potential they hadn't anticipated.

What are the long-term benefits of custom software development in terms of ROI?

The above benefits provide not only a short-term fix but will also have a positive long-term impact on your ROI. The most familiar long-term benefits are as follows:

1. Increased Efficiency: Better processes will lead to cost savings over time.
2. Improved Productivity: Automated tasks will reduce natural human errors.
3. Competitive Advantage: set yourself apart from competitors by offering unique features unavailable in off-the-shelf software.
4. Scalability: Your custom software will scale as your business grows.
5. Cost Savings: Reducing the need for ongoing advancements, upkeep, and recurring licensing fees with off-the-shelf software.

What factors should be considered when calculating ROI for custom software development?

You should carefully consider the factors impacting your ROI for custom software development. The main factors that will influence your decision should include:

• The initial software development cost. The cost of developing your custom software is an essential factor in calculating ROI. You must consider the development cost, the hardware you’ll require, and the infrastructure to support the software.
• Implementation (roll-out) costs. There will be a cost involved in implementing your new software, including any required staff training.
• Maintenance and support costs. It’s important to work out the ongoing costs of maintaining and supporting the software, including possible licensing fees and hardware and infrastructure costs.
• Time to market. The time it takes to develop your new software will impact your ROI. A fast and efficient turnaround will help you see an increase in your ROI sooner.
• Customer satisfaction and new revenue. Factoring in your projections on how your customer satisfaction will be increased is paramount. Increased customer satisfaction will lead to an increase in income.
• Potential risks. Something that is often overlooked is the potential risks that could impact your ROI calculations. Risks can include delays and unexpected costs.
• Integration time and cost. Integrating the software with pre-existing systems may necessitate time and resources from the current provider. This will invariably incur additional fees.

Other factors include:

An agile approach

Taking an agile approach to development methodologies can have a favorable impact on your ROI. Agile methods concentrate on delivering your software in a quicker and more iterative process. This approach allows for faster feedback and continuous improvements, rather than waiting to improve in one go, which could temporarily impact your processes. An agile approach often means you can deliver your software much quicker. It offers greater flexibility and improved quality.

Mischa at Valudio shared his thoughts on using an agile approach:

User experience (UX) design

Although it may not be the most crucial aspect of your custom software development, user experience design plays a significant role due to its impact on user acceptance and the ease of platform usage. By choosing a custom software development approach, you will be building a relationship with your developers that will allow you to work together to ensure you create the best software platform to help with your business processes. Building a system that provides the best UX will, in turn, increase productivity, reduce support costs and provide you with an advantage against your competitors.

Optimizing the deployment

Optimizing the deployment of your custom software can have many positive impacts. As mentioned above, Agile methodologies will help by providing a consistent and streamlined faster time to market. Integrating automated testing into your deployment pipeline ensures that each new release is robust and reliable. This improves the quality of the software and reduces the time spent on manual testing, further accelerating the deployment process. Cloud computing can bring significant cost savings, as it often requires less upfront investment; you can adopt a pay-as-you-go pricing model. Deploying software without the means to track its performance can hamper optimization efforts. Incorporating monitoring and analytics tools allows you to track the software's effectiveness and make data-driven improvements. This approach contributes to a faster, more measurable return on investment (ROI).

The size of your business

Of course, the ROI of custom software development depends on your business size. Smaller businesses may have a smaller budget, meaning they must hone in on the most important things they want to achieve from the software enhancements. The benefit of a custom software package is that it can boost competitor advantage by streamlining the processes that would ordinarily have been done manually.
Larger enterprises tend to have a more complex business model and, therefore, will benefit from efficient processes and increased productivity. They will often have more considerable funds to invest in custom software development.

Smaller businesses are more likely to see a faster return in terms of ROI. The cost of development will be cheaper, and the development workload will be lowered. Larger businesses will see a higher ROI in the long term as it helps build collaboration between departments and tackles larger-scale operations.

Prioritizing features and functionality

Being able to prioritize the features and functions that are critical to your business is one of the most influential reasons for choosing custom software development. Start by identifying your business goals and your KPIs (key performance indicators) and identify the user needs. From here, you should be able to create a list of required features. This strategy guarantees that your software development team focuses on the features and functions that matter the most to your business.

Benefits of leveraging emerging technologies

Leveraging emerging technologies such as AI, blockchain, or IoT in custom software development can provide impressive returns. As technologies change, so can your business. Leveraging technologies can aid your efficiency and customer experience. It will provide great future-proofing for your processes and help give you an advantage over competitors.

 Risks

As with any business decision, when calculating the ROI of a new investment, you have to evaluate the risks. New custom software can be a substantial investment for a business, so first and foremost, you need to determine the cost of custom software development. This will depend on a few factors, including how complex the project is, how many developers you need, how long it will take, and whether it requires different levels of expertise and the technology needed.

Here are a few common risks and uncertainties associated with custom software development that should be considered when calculating your ROI:

• Project scope. It’s important to consider the project scope carefully and plan for additional costs and delays.
• Recurring maintenance expenses. These will depend on the complexity of your application. You may have to upgrade frameworks and core software modules regularly.
• Collaboration. Communication here is critical. After the project finishes, you have to discuss how you will handle the partnership. Valudio aims to be a long-term partner for all our customers.
• Commitment. You have to be committed and actively engaged in the project. It's essential to ensure you get what you want and include all the people this new software will impact. Time will need to be allocated to allow for testing. Processes and situations can often seem more manageable than they are. Take the time and think through all the dependencies a process has. What are the implications of changes to that process? Did you consider all the different scenarios? A new custom software design doesn’t happen overnight.
• Changes to the requirements or technologies. Prepare and think through all the aspects of the software you want to build and the respective processes that will be impacted. It's expected that as time passes, requirements will change, as will the technologies available to you.
• Future-proofing. Any ideas about future development enhancements should be communicated with your development team. Setting up from scratch costs far less than changing it once you have a complex project running.

Reducing your risks is, of course, the best way to help increase your ROI. Risk mitigation relies on stringent pre-planning. It is time well spent.

You should always define precise project requirements from the outset. As Mischa explains,

You should always keep communication fluid. Talk about potential recurring costs with your software development partner specific to your project. Regular meetings and open communication will help to address any potential issues promptly. Implementing an agile methodology will also help you manage your risks by delivering your project into smaller, more manageable parts, making identifying and addressing any issues easier.

ROI Calculations

Let’s get down to the nitty-gritty. How do I work out the ROI of my custom software development, we hear you ask?

The pre-implementation ROI calculations will depend on various factors, so there is no natural way to estimate ‘a typical’ software ROI. The factors will depend on what type of software is being built, the industry it is needed for, and the scale of the development.

A good ROI is any percentage that shows the investment outweighs the cost.

The expected percentage will vary from business to business. There will be an impact based on the investment size and industry trends. Some companies expect an ROI of over 100%, whereas smaller firms would be happy with an ROI of 10-20%.

Here are a few questions that will help when you consider your calculations.

Can you predict ROI? Thinking about …

1. Automating manual or repetitive tasks, reducing cost
   You can determine how many hours you can save per week/month/year and contrast it against the cost.
2. Customer engagement and satisfaction
   1. An increase in engagement will see an increase in your sales.
   2. Lower customer churn rate.
   3. Digital services will make it easier for your customers to collaborate with you.
   4. Being considered an innovative company will increase the value of your brand.
3. Data security and compliance
   Operating data security and compliance can be a time-consuming task when done manually.
4. New revenue streams
   Opening up a new revenue stream through software development can be invaluable to a new business.

Here are the steps to calculate ROI for customer software projects:

1. Determine the total cost of the project: This has to include all expenses associated with the project, including the cost of the software development, hardware, licensing fees and labor costs.
2. Determine the project's benefits: The benefits will include increased revenue and calculated cost savings. All the benefits you list have to be translated into monetary terms.
3. Work out your net profit: Subtract your project costs from the total benefits to determine the net profit.

Finally, calculate the ROI by dividing the net profit by the total project cost and multiplying the result by 100 to get the ROI as a percentage.

The formula for calculating ROI should look like this:

ROI = ((Total Benefits - Total Costs) / Total Costs) x 100

Key Performance Indicators

Now, it’s time to look at the KPIs that can be used to measure ROI in custom software projects.

1. Your Return on Investment is the most common KPI used to measure the financial benefit of a software project.
2. Payback Period: This is the calculation that will determine the amount of time it takes for the benefits of the new software project to match the cost of the project. The shorter the payback period, the better the ROI.
3. Net Present Value (NPV): This KPI is a way of measuring the value of the software project in an actual monetary amount.
4. Internal Rate of Return (IRR): This will measure the rate at which your software project generates returns.
5. Customer Satisfaction: Evaluating the customer satisfaction level will indicate the success of your new software.
6. User Adoption Rate: As mentioned above, this KPI will measure how users adopt the software.

Although some may seem similar, it’s important to note the differences between ROI, payback period, and net present value in software project evaluation. In short, ROI measures how efficient the investment is, and the payback period measures the time it takes to see a return. NPV measures the project's net value after considering the money's time value.

You can use the package to calculate your ROI if you're an avid Excel user. Your formula will look like this:

= ((Total Return - Total Cost)/Total Cost) * 100

Post-deployment ROI calculations are the same as you have already been doing, but you will be using actual results. You will compare the project's solid financial gain and costs with your previous calculations.

Over time, you will need to track and manage the ROI of your software project. Your first step will be to define a straightforward process that will be used to measure your ROI. These will sit in line with your company goals.

These metrics should be:

• specific,
• measurable,
• achievable,
• relevant,
• and time-bound.

This is considered the SMART way to measure ROI based on the success of your software development.

Next, you will establish a baseline. Your baseline or starting point could be your current revenue or even the cost associated with the process that the software is being developed. You should track all the spending on the software project, including development, hardware, licensing, and personnel costs, and measure the benefits periodically. This can be done by comparing the actual results to the projected results.

Once the benefits and costs have been established, you can calculate the ROI by dividing the benefits by the costs. This will provide a percentage that indicates the profitability of the project.

You must continuously monitor and optimize the software project you have built. This will ensure that it still meets your ROI expectations.

How can you calculate the total cost of ownership (TCO) of custom software development to determine ROI?

The steps to calculate the TCO are as follows:

• Determine the extent of the software development project.
• Specify the development costs.
• Estimate the hardware and software costs.
• Consider ongoing maintenance and support costs.
• Factor in the cost of training.
• Determine any potential cost savings or revenue generated by the software.

To calculate your TCO, you will add up all the costs associated with the project and then subtract any savings or revenue generated since your baseline.

ROIs for different departments

The ROI doesn’t have to apply across the whole business. You can determine the ROI of custom software development for different business units or departments in the same way as you would the entire business. You just need to break it down into departments. Once you have defined the goals for each department, you can determine the costs associated with the software development project for each. You can then calculate the expected benefits. Calculating the ROI remains the same, dividing the expected benefits by the costs.

Convincing decision-makers

Investing in new custom software development takes time and planning, and it involves many members of the management team, stakeholders, and other decision-makers from the business. When you present your project, ensure a clear business case demonstrates benefits, costs and timeframes. Highlight critical problems and the impact that each of these problems has in the day-to-day running of the business, as well as the opportunities that could arise from this. Provide case studies or examples of similar successful projects and show the potential risks of not investing in custom software.

When deciding on a software development project, clearly define the objectives the software will tackle. Your investment in the software needs to align with your overall business strategy. You will need to have a clear sight of your KPIs that will measure the project's success and allow you to calculate success in monetary value. A clear vision of your project plan, including timelines, budgets and the resources required, is essential. The project will need to be monitored from the outset. This allows for changes to be made as you go.

Following such practices will help you to ensure that your custom software development will deliver a positive ROI.

Future-proofing

Ensuring your custom software development is scalable and flexible for future growth is vital. You can achieve this by:

1. Choosing future-proof technologies that have a big developer pool. Avoid niche technologies.
2. Avoid proprietary technologies that have a vendor lock-in.
3. Keep your solution simple. If you think of a feature, try simplifying it as much as possible. Fewer features → less
4. complexity → less uncertainty → fewer unexpected costs.
5. Scalable software architecture.

Best Practices when calculating your ROI

As we draw towards the end of our article, we think it’s beneficial to outline some of the best practices for maximizing the ROI on your custom software development. These factors will help you stay focused on the project without losing sight of your goals.

Also:

• Use open-source technologies without licensing costs.
• Always focus on what will increase productivity and drive cost reduction.
• Create new income streams and digital services that generate additional revenue.
• Look to decrease errors that could cause additional costs.
• Your goal is to increase customer satisfaction, service, and loyalty.
• Remember your staff: increase employee satisfaction and retention with digitized internal workflows.
• Ensure you have the correct compliance in place.
• Fight skilled worker shortage by optimizing processes and workflows.

With the right partner and open communication, your software development project can be a surefire win for your business. Valudio’s passion for customized digital solutions is the starting point you’re looking for. We can help you to transform your business.

Let us help you to clarify your ideas and iron out your challenges. We can build a solid, scalable digital solution. New software development will help keep your business agile and efficient, and here at Valudio, we know just how important that is.