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Calculating the ROI for RCM Companies in Custom Software Development

Paul Kovalenko Paul Kovalenko | June 11, 2024 | 7 min

According to Grandview Research, spending on custom software development is expected to reach $146.18 billion by 2030. However, with such significant investments, the importance of evaluating the profitability of software projects cannot be overemphasized. 

As spending grows, businesses need to ensure they are getting good value for their money and staying competitive in an expanding market — and this is where software ROI calculation comes in. Revenue cycle management (RCM) companies use this calculation to determine whether custom software is worth the cost, helping them make smart decisions.

Read on as we discuss how software ROI is calculated in this article.

What is Return on Investment (ROI)?

ROI, or Return on Investment, is a financial tool that assesses how well an investment has performed. It measures profit or loss in relation to the investment’s cost. People use ROI to gauge investment effectiveness and guide decision-making.

ROI is calculated as:

Where:

  • Net Profit = The total earnings after deducting the initial investment amount. 
  • Investment Cost = The money put into the investment.

Why Measure the ROI of Software Investments?

Calculating ROI helps determine if certain goals—improved processes and workflow, competitive advantage, better decision-making, and financial gain—are met. Let’s break things down.

  1. Financial Justification. Calculating ROI ensures the investment in a software system yields sufficient financial returns, validating the money spent is worthwhile.
  1. Performance Measurement. ROI acts as a benchmark to measure the software’s performance post-implementation. It compares actual results with expected outcomes and evaluates the success and impact of the software project.
  1. Stakeholder Confidence. A positive ROI builds confidence among stakeholders, demonstrating that the investment supports the organization’s strategic goals.
  1. Competitive Advantage. Analyzing ROI highlights strategic benefits from the software system—increased efficiency, improved care delivery, or enhanced innovation. The result tells you if your investment gives you a competitive market edge and drives growth.
  2. Decision-Making Support. ROI calculations offer valuable data for decision-making, providing a quantitative basis for evaluating software options. It ensures that choices are financially sound rather than based on intuition.
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Important Factors in Calculating Custom Software Development ROI

Calculating ROI in software development involves a detailed analysis of several key factors, including a project cost estimation. Here’s what to know:

Development Costs

These are all expenses related to the software development process. This includes salaries for UX/UI design, project management, developers, etc. The US Bureau of Labor Statistics (BLS) reports that in 2023, software engineers and QA testers made an average of $62.58 per hour. This figure does not include wages for project managers and other non-coding roles.

Implementation Costs

These are costs incurred when introducing the software into the operational environment. These costs include:

  • Hardware and Infrastructure. Upgrading or acquiring new hardware to support the software.
  • Data Migration. Moving data from old systems to the new often incurs substantial expenses.

Maintenance and Support Costs

These constitute ongoing expenditures required to maintain the functionality and relevance of the software. According to Wikipedia, 75% of software life cycle costs are associated with maintenance.

Staff Training and Onboarding Costs

These costs are associated with getting employees up to speed to utilize the new software proficiently. According to Training Mag, companies may spend up to 16% of their budget on IT training. 

Opportunity Cost

These costs account for the opportunities lost when selecting one option over another. Unlike an off-the-shelf solution, implementation delays in custom software development scenarios might translate into missed business opportunities or diminished competitive edge.

The opportunity cost for training should also be factored in. If an employee’s work is worth $50 per hour, 40 hours of training means an opportunity cost of $2,000.

Average Expected Lifespan

You may also want to factor in how long the software will continue to generate returns. The anticipated lifespan of custom software typically ranges between 6 and 8 years, contingent on technological progressions and business requirements, before significant revamps become necessary.

By considering these factors, you can gain deeper insights into the ROI implications of custom software development endeavors.

The Impact of Software Type on ROI Measurement

The type of software significantly influences how you measure ROI due to its different uses, implementation scopes, and benefits. Let’s see how to calculate for productivity, enterprise, and SaaS software.

Productivity Software

These tools, such as word processors and project management software, boost operational efficiency. They enhance individual productivity, save time, and foster collaboration. 

To measure ROI: calculate the time saved and increased employee output using the software. For example, if a company has 100 employees, and each saves 2 hours per week, valued at $50/hour:

Annual Savings = 100 × 2 × 50 × 52 = $520,000.

Calculating ROI should also factor in the improved job satisfaction that can lead to lower turnover rates.

Enterprise Software

These encompass large-scale systems such as ERP, CRM, and EMR/EHR—software that enhances operations, data accuracy, decision-making, and customer service. 

Enterprise ROI focuses on reducing operational costs due to streamlined processes. For example, if implementing an EHR system reduces operational costs by $1 million annually and increases revenue by $500,000:

Annual Benefit = $1,000,000 + $500,000 = $1,500,000.

This calculation should also consider side benefits like improved customer service, decision-making, and scalability.

SaaS

SaaS (Software as a Service) is a cloud-based model where a third-party provider hosts applications and makes them available online. This approach eliminates the need for installation, maintenance, and updates.

SaaS ROI primarily involves recurring subscription fees instead of traditional one-time costs. Key considerations include estimated returns, implementation, and staff training expenses. 

The process is simpler since the SaaS vendor manages development and maintenance—you only pay the subscription fees.

Looking for a solution tailored to your specific needs that ensures a high return on investment?
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The ROI Formula for Software Development

So, how do you calculate ROI? The basic formula is:

In the context of software development, the formula can be broken down into the following components:

  1. Net Profit. The total financial benefit realized from the software development project. It includes increased revenue, cost savings, and other financial benefits directly attributable to the software.
  1. Cost of Investment. All costs associated with developing, implementing, and maintaining the software. 

How to use this formula:

Identify the Financial Benefits

  • Increased Revenue. Additional income was generated due to the software.
  • Cost Savings. Reduction in operational costs, labor, time saved, etc.
  • Other Benefits. Improvements in productivity, customer satisfaction, or other qualitative benefits translated into financial terms.

Calculate the Total Cost of Investment

  • Development Costs. Sum up all expenses related to the creation of the software.
  • Implementation Costs. Include costs for hardware, infrastructure, and initial training.
  • Maintenance Costs. Consider ongoing expenses for keeping the software operational.
  • Determine the Net Benefit. Subtract the total cost of investment from the total financial benefits.

Apply the ROI Formula:

According to iSixSigma, a good return on investment software should be between 5% to 10%.

ROI Calculation Example for an IT Project

Let’s see an example of calculating ROI using an ERP development and implementation.

Custom ERP Development and Implementation

A healthcare facility invests in a custom ERP system to streamline operations, improve records management, and enhance care delivery. Let’s calculate the returns.

Financial Benefits

CategoryDetailsAmount
Increased RevenueFrom decreased paper records, improved safety, and more efficient billing processes$800,000
Cost SavingsFrom reduced paperwork, optimized work schedules, and improved documentation$1,200,000
Total Financial Benefits$2,000,000

Costs

CategoryDetailsAmount
Development CostsCustom development, coding, testing, etc.$600,000
Implementation CostsHardware, infrastructure, initial training, etc.$200,000
Maintenance CostsAnnual support, updates, etc.$100,000
Total Cost of Investment$900,000

Net Benefit

Total Financial Benefits – Total Cost of Investment Net Benefit = $2,000,000 – $900,000 = $1,100,000

ROI Calculation

=

The project’s ROI is 122.22%. This means the facility gained an additional $1.22 in benefits for every dollar spent on the ERP system.

Conclusion

Calculating ROI is key to determining the strategic benefits of your software investment. It reveals whether or not the software project delivered tangible benefits such as cost savings, increased efficiency, and enhanced business operations. Hopefully, the steps in this article have shown you how to calculate it. Alternatively, you can look for a free software ROI calculator online.

One way to increase return on software investment is by development outsourcing. This approach allows you to tap into the expertise and efficiency of specialized development teams, cut down on development expenses, and speed up time-to-market—a sure formula for superior returns.

At Langate, we specialize in custom application development catering to your business requirements. Our skilled team can deliver top-notch, scalable, cost-effective, and positive ROI software that fosters growth and innovation.

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