How to work out the return on investment (ROI) of implementing SaaS?

A key aspect of incorporating new technology into business processes is calculating the ROI of software. Knowing how to make this estimate avoiding those frequent mistakes that are usually made, makes us prepared to make the best decision.

It must always be calculated taking into account at least two starting points: the current situation, compared to the new project (it is carried out in companies that already have a warehouse that they want to replace), or two new solutions to each other (there is in cases starting from scratch).

The analysis of the cost of an installation and the = return on investment is an exercise that should be included in any project.

What measures can you use?

When a client invests in technology, the first question asked is: What will my return on investment be? Whether in social networks or in the cloud, knowing how to calculate ROI is essential to convince the company’s director, give continuity to the project, and even reassess some points of the
strategy.

The benefits, some intangible, cannot simply be translated into numbers. Especially for companies that already have part of their virtualized environments and that already optimize resources on another level.

However, at the time of making the accounts, the first sum that comes in favour of Cloud Computing is its entire ability to offer the user access at any time. The second is the reduction in maintenance costs with the investments of new hardware and specialized equipment and the continuous updates of its software.

What are the main factors?

An extremely certain point of the cloud is its network and storage capacity. Companies that migrate for Cloud Computing solutions have an extraordinary profit on these issues, paying little for them. As with any significant technological change, transferring data to the cloud requires a different formula to calculate return on investment. For companies focusing on short-term costs and traditional metrics, cloud application deployment may or may not be added to planning. But for organizations that value business agility, development productivity, customer retention, and market
leadership.

In reality, the Cloud ROI calculation varies according to each company’s business methodologies and the problems solved by Cloud computing.

This example will help you to learn the difference between the absolute return on investment and the annualized return on investment:

Absolute returns formula

The end amount of the investment – Initial amount of the investment)/ Initial value of the investment

For example, you have an initial investment of Rs 25,000 that has expanded to Rs 30,000. You may estimate the absolute return as : 30,000 – 25,000 / 25,000 = 20%.

Annualized return formula

End Value – Beginning Value/Beginning Value
For example, you had purchased a residence for 30 lakh in January 2010 and auctioned it for Rs 50 lakh in January 2020. You have the initial investment amount as Rs 30 lakh and the final amount of the investment as Rs 50 lakh. The holding period is five years. You may estimate the annualised return as: 50,00,000 – 30,00,000 / 30,00,000 * 100 * (1/5) Annualised Return = 13.33%.

Common mistakes when calculating the ROI of a software

As in other projects, IT managers can easily make some mistakes when calculating the ROI of software. One of them, which is quite recurrent, is to overestimate the expected benefits and, in contrast, underestimate the costs other than the acquisition/use of the software. To avoid this, it is necessary to be cautious and meticulous when obtaining the figures.

Another common mistake in SaaS Implementation is to compare the initial investment with the returns without taking into account that many of the benefits can be conceptual or intangible. It can be difficult to decide on a specific monetary value, but these benefits cannot be completely ruled out. The recommendation to work on different scenarios can be a support to face this task correctly.

Finally, when it comes to time, managers forget the value of their and their employees. And when the project exceeds the planned deadline because not enough resources were allocated, costs skyrocket. This is something to consider for the correct implementation and that the calculated ROI is an accurate estimate.

Conclusion

No one management formula works perfectly for all situations. Each company has its specificities, which vary according to the segment of operation, the type of consumer it serves, the geographic market in which it operates, and so on.

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