ROI Calculations On Custom Software Projects
Invene significantly grew in 2021. For those who aren’t familiar, we create custom software for fast-growing HealthTech companies. COVID-19, while bad for more traditional companies, has been very good for the Health IT sector. As such, our existing clients have continued to expand their relationship with Invene, and we are always landing new projects.
As CEO of Invene, I’m always on the lookout for ways to make the company better. As such, one of my strategic goals for 2022 was building some custom software to help Invene’s internal operations scale more efficiently. Invene has never built an internal tool before, but due to our rapidly expanding team, I decided it was worth investigating. As such, I’ve detailed how I personally approach the software development process that I take with our clients. My hope is that it helps you make better decisions on what software you ultimately decide to build.
In my opinion, the first and most important step in any software development is the return-on-investment (ROI) calculation. Most software projects that fail, fail because they should have never been built. Even if the program works flawlessly, it is destined to fail if it has no realistic ROI. At the end of the day, businesses are about making money. Custom software makes the company money in one of two ways: decreasing costs or increasing revenue. If the custom software cannot do this, it’s better that it’s not built.
The ROI you need is dependent on how big your company is. Smaller companies need bigger ROIs than larger companies. For a small business like mine, I’m generally looking for a 3x to 5x ROI within 12 months of finishing the product.
Below is a real-life example of an ROI calculation I performed on one of our 2022 strategic initiatives. It only took a couple of hours, and I won’t spoil it, but it was well worth the time spent.
INVENE’S 2022 STRATEGIC SOFTWARE DEVELOPMENT PROJECT
I wanted to build out internal tools to handle invoicing, payment, and reporting. Right now, my awesome Executive Administrator is manually doing this. She’s doing a great job, but the amount of work is increasing overtime as we add new employees, contractors, and clients. As such, I wanted to build a suite of software tools that handles some of this and she’ll act as a manual override. It’s not realistic to fully automate this process due to the constantly changing nature of Invene’s business. When building custom software, especially internal tools, it’s almost always better to have the software output a result and then have a human modify it. This avoids the problem that occurs with business software where programmers play whac-a-mole with a million different edge cases and no one is ever happy with the end-result.
HOW MUCH DOES IT COST TO CREATE?
Engineers
All of Invene’s engineers are currently assigned to client projects. As such we have no spare resources to develop this software. That’s where the UTDesign Computer Science Senior Capstone Project comes into play! This is where three to five senior students at the University of Texas at Dallas (UTD) work on a software project for a semester. I’m a very proud alumni from UTD and my first two employees came directly from this capstone project. As such, I love sponsoring capstones as it allows Invene to try out and recruit junior-level talent. You wouldn’t want to use college students for production critical projects, but for an internal automation tool like this, it’s a good fit. For two semesters it would cost Invene $20,000. P.S: Interested in paying for a UTDesign Senior Capstone Project? Feel free to reach out to me and I’ll give you an intro to the person who runs it! It’s a great program.
As part of the UTD Capstone Project, one of my engineers must be Invene’s corporate contact to ensure students are hitting deadlines and to provide technical mentoring. This will give one of my engineers the opportunity to start building up their leadership skills in a low-risk environment. I predict it will take five hours a week for two semesters. Since we are a services firm, when calculating ROI, I use my engineer’s billable rate, not their actual cost to the company. The reason behind this thinking is that every hour the engineer spends on an internal project is an hour not billable to our clients. In my business, time is money – literally. While we have a wide range of engineering rates, for this calculation I’ll set it at $130 per hour. This means to manage the project, it will cost Invene $16,900.
UX/UI Designers
While we don’t need UX/UI designers for this project, they help make the software look better. If I’m going to spend time developing an internal tool, I want it to look good. While there’s many programming libraries out there that allow developers to create decent looking applications, it is no replacement for a great UX/UI designer. Luckily, this is a simple application. I figure it will only take my UX/UI designers about 120 hours to throw together all the screens. At $130 per hour, it runs $15,600.
Domain Experts
To ensure the success of the project, it is a good idea to have a domain expert involved in the project. As such, my executive administrator would be the go-to person since she’s the one that will be handling the software manually. I’m assuming that takes five hours a week of her time for 26 weeks, coming out to $5,200 per year.
Executive
Software isn’t all about the individual contributors to the project. It also requires a stakeholder’s time and buy-in to be a success. As such, when calculating ROI, I always make sure to include how much time the C-Suite, VP, or whoever, will spend ensuring the project is heading in the proper direction. For this project, I’m assuming it will take me around 30 hours to write requirements, get my team onboard, test, attend the final pitch meeting, etc. That’s another $9,000.
Total Cost: $66,700
UTD Capstone Engineers: $20,000
Engineering Mentor: $16,900
UX/UI Design: $15,600
Executive Admin: $5,200
CEO: $9,000
HOW MUCH DOES IT COST TO MAINTAIN & HOST?
You can’t just build software and then leave it alone. It needs to be maintained. Not putting software maintenance into the ROI calculation leads to unrealistic estimates, especially for larger projects. Since this is a super-simple project, maintenance isn’t a major concern, but it’s important to look at it just the same. Some software may be cheap to build initially, and then quickly turn expensive as maintenance may be high.
For my calculations, I assume this takes an engineer 6 hours a month to maintain. This includes security patches, upgrading infrastructure, minor change requests, and everything else that comes with hosting an internal solution. This means we’re spending $9,360 of engineering time for maintenance. On top of this, I’m assuming it costs around $200 per month to host on the cloud, meaning we’re spending $2,400 per year. So total maintenance runs $11,760 per year.
HOW MUCH MONEY DOES THIS PROJECT SAVE?
The software would help automate three different tasks my executive administrator performs: invoicing, payments, and reporting. When she was first hired, I spent time overseeing her work, but now she handles it independently without oversight. As such, it’s only her time costing Invene money to perform the task now and not any of mine.
On invoicing tasks, she spends approximately 2 hours per week. This does not include the time it takes to ping all my team members to confirm they entered correctly all their hours into our time-tracking system, Toggl. Since there are 52 weeks in a year, it’s costing us $4,160. Even with this automation, I assume she will have to still spend some time invoicing and doing manual overrides. As such, I estimate there will be a 90% reduction in time spent on this task. As such, by automating invoicing, Invene would save $3,744 in her labor costs.
On payment tasks, she spends approximately a half hour per week. However, since we have now hired salespeople and must pay commission, the time will increase to 1 hour per week. Since there are 52 weeks in a year, payment tasks are costing Invene $2,080 and with a 90% reduction in time it will save Invene $1872.
On report tasks for my executive team, she spends approximately one hour per week. Assuming the same 90% reduction, rather than showing my work (hey, this ain’t school no more!), I can just copy the above number at $1872.
As such, the total savings on her manpower would be $7,488. Let’s round up for the sake of nice numbers and make it $7,500.
REAL ROI CALCULATION
Here’s the three different part of our ROI calculations:
Total Savings: $7,500
Resources: $66,700
Maintain & Host: $11,760
Drum roll please!
This means the total ROI is -$70,960. While I was expecting a 3X to 5X return on my investment within 12 months, I’m losing almost 71K in the first year! That’s bad. Really, really bad.
WHAT ABOUT INTANGIBLE ROI?
Ah, but what about intangible ROI? The executive administrator and engineering lead will be gaining invaluable leadership skills. This will allow Invene to test out and recruit great CS students from UTD. It would also be a long-term asset of the company as we would own the IP, not our clients. It would free up the executive administrator time to work on more important tasks.
Not to mention, what if I write a whole series about the journey of building this software start to finish? Surely a top-tier healthcare executive will read the blog posts and think “man, this James Griffin guy, sure knows how to build software” and we’ll close a multi-million deal because of my writing. Think about all the revenue this internal software would make us!
All of these thoughts swirled around my head when I saw just how bad the ROI calculation was. They may seem ridiculous, but it’s true. I really want to do this project! It’s one of my 2022 strategic goals and I had already told UTDesign I had planned to do 2 capstone projects with them. I came up with all sorts of intangible ROI that made this project a no-brainer.
But here’s the thing about intangible ROI – it’s almost always a load of bull. It’s a way that we, as executives, delude ourselves into thinking our project will be worth it, while in fact, it is better to axe it before we even start. Our time is so valuable. Unless it’s a massive return for the business, a project like this isn’t worth it.
ROI CALCULATIONS SAVE TIME
This project had been one of my big 2022 strategic goals. However, the ROI calculation forced me to be honest with myself and take a realistic view of what Invene would gain. As such, I removed it from my list as it would be a massive waste of our time with very little gain. If a client asked Invene to build the software above, I’d instantly tell them no and advise them from building it.
I absolutely despise ROI calculations with a passion. However, it’s the most important part of the project–internal or external. Otherwise, you get six to twelve months in before you realize you didn’t accomplish anything. Oftentimes, killing a project can be the best thing you can do for your business.
