CAD Manager's Newsletter (#429)25 Jun, 2019 By: Robert Green
Calculate the ROI of Today's CAD Software
Unsure about whether you should switch to a shiny new CAD application, or implement an intriguing new utility? The ROI never lies, so start crunching numbers!
In a previous installment of the CAD Manager's Newsletter, we talked about implementing a proactive CAD management program, so problems can be prevented rather than fixed. One of the key elements of that proactive approach is to always keep an eye on which software applications best suit your needs and budget.
But given all the variables involved in selecting software, how in the world can you make the best choices? In this edition, we will explore how to consider cost savings and return on investment (ROI) to make smart software decisions based on financial parameters rather than marketing spin. Here goes.
What Is ROI?
First of all, we need to cover the basic concept of return on investment (ROI) and explain why it is a persuasive tool in your CAD management arsenal. As the name implies, ROI is a way to determine the return you can gain from making a given investment. Any software you spend money on should generate a labor savings amount that justifies the spending. After all, if you're not cutting costs by improving efficiency and saving user time, what's the point of implementing new technology?
To express ROI in equation form, we could say this:
or, in other words,
Looking at the equation, a truth becomes evident: Savings must be greater than the investment in order to achieve a positive return.
Keep in mind that CAD software typically has a working life of several years, meaning that analysis over an extended period — typically three years — becomes necessary.
This all may sound complicated, but it really isn't once you see how it works. To gain this understanding, we'll do a couple of example calculations so you can learn the terms by context.
Example 1: Switching to a New CAD Software Application
Let's say that we're considering switching from our current CAD software application (CAD software A) to a new one (CAD software Z). How will we go about calculating the ROI of the switch? Well, we'll need to know how much time/labor savings we can achieve:
|•||Labor savings per year from Software Z = $500|
We'll also need to know all the costs associated with making the switch:
|•||Cost to obtain Software Z = $1,000/year subscription|
|•||Cost of training in first year for Software Z = $500|
|•||Cost of ramping up to productivity in year 1 for Software Z = $1,000|
We're looking at these savings and costs over a three-year time span:
|•||Savings = 3 years @ $500/year = $1,500|
|•||Costs = 3 years of subscription @ $1,000/yr + $500 training + $1,000 ramp up = $4,500|
Taking all of the above into consideration, our three-year ROI for Software Z would be:
This is an example of a negative ROI, because we will never save more than we spend (Return < Investment). To use an investing analogy, would you deposit $4,500 in the bank to have it be worth $1,500 three years later? I didn't think so.
Sample ROI Handout and Recorded Webinars Available
For another take on calculating ROI, get Robert Green's ROI Handout that shows an example of the personnel costs of using subpar computers for CAD work, and check out the associated recorded webinars.
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