CIOs are often the decision-makers when it comes to software investments. However, it is up to the CEO to keep track of budgeting to see if those investments pay off. They must use metrics and key performance indicators (KPIs) to determine whether they should continue investing in a software product, or if they should find more efficient solutions.
In fact, according to our recent 2024 CEO Sentiment Study, 53% of CEOs plan to keep their 2024 spending and budgets the same. That makes tracking these KPIs all the more important.
Measuring ROI requires analysis and math calculations. Once CEOs have this knowledge, they can determine which products stay, which products go, and the most efficient ways to spend their budget.
What is ROI?
Return on investment (ROI) is the profit you make off any business investment. Calculating ROI requires accounting for all investment costs and all income generated.
CEOs may use a predeveloped formula to calculate ROI as follows:
X= The project’s total cost including development, integration, support, and software purchase costs
Y= The return on the project, i.e., the amount the project generated in gross income
ROI = (Y/X) * 100
The end number reflects the profitability generated for each dollar invested.
However, each project has nuances that may affect ROI. A CEO must consider these factors and adjust accordingly.
KPIs and Metrics to Consider When Measuring ROI
Breaking down ROI into a simple formula seems easy, but extensive planning must go into every investment. Planning will increase the likelihood of profitability. It will also help CEOs consider factors that may affect ROI.
Here are some considerations to make that ensure CEOs make smart decisions, use their budgets effectively, and determine ROI accurately.
Define Goals
CEOs must work with CIOs to determine the short-term and long-term goals of their software investment. Then decide on the steps you must take to achieve those goals. Communicate this plan with your teams to ensure KPIs are met at every stage in the development or acquisition process.
Calculate Development Costs if Applicable
Expenses will differ depending on whether the software is developed in-house or acquired through a third party. Third-party acquisition does not involve development costs. However, you must also consider the cost of implementation, training, and ongoing fees for maintenance and upgrades if applicable.
The cost of software developed in-house does not require third-party fees for the software. However, you must consider the cost of development, testing, and launching.
Define Your KPIs
KPIs vary depending on the industry and company goals. They may include:
- Customer acquisition
- Customer retention
- Improved productivity
Weigh Your Costs Against Your KPIs
The final step involves weighing your costs against your KPIs. Compare measurable KPI results with development and/or acquisition expenses to determine the benefits of your investment. Estimate your ROI based on the software’s lifetime considering maintenance costs and other fees.
How to Make Smart Software Investments
It is every CEO’s goal to make smart investments that boost ROI. Here are some factors to consider before making a software investment decision.
Evaluate Risks
Every investment requires some degree of risk. Not investing can also be risky. Analyze your risks based on the following factors:
- Tech Integration: Will the new software integrate smoothly with your existing software? Will you require other updates before integration?
- Business Advantages: How will the software benefit your business in terms of growth, productivity, and customer acquisition and retention?
- Employee Readiness: Will my team require training to use the new software? How much training will they need? Will they be happy with my tech decision?
Scalability
CEOs must consider scalability in their purchasing decision. Will the software scale with company growth? Or will the company outgrow the software before it reaches its full potential?
Time to Value (TTV)
How long will it take the company to see the value of the investment? Extensive training will increase the time it takes before the product begins turning a profit. Other factors will also play a role.
If the product takes a long time before achieving profitability, it could negatively affect cash flow. Its immediate ROI will also be affected.
Obsolescence
How long will it take for the software to become obsolete? When will it require an update or replacement? Obsolescence is a major factor in industries with a lot of competition and innovation.
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