Calculate the ROI of Today’s CAD Software25 Jun, 2019 By: Robert Green
CAD Manager Column: 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/year + $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.
Example 2: Adopting a Less-Expensive Software Utility
In this example, we’ll consider eliminating an expensive tool in favor of something much less expensive. The new option requires some training, but delivers high ROI thanks to the reduction in software cost.
We presently use a full-cost CAD license (the subscription costs $1,000 per year) to create data tables for plotting field documentation. It’s been determined that we can instead use the Utility X program (which costs $500, plus $100 per year in upgrade fees) to read data from our DWG files and create the data tables without the need for a CAD license. We expect to spend $250 on training for the utility, plus $500 in ramp-up time. We’ve determined the amount of time to make data tables will be about the same using Utility X, so there are no increases or decreases in labor to consider.
In this case, our three-year ROI for the utility looks like this:
- Savings = 3 years of CAD subscriptions @ $1,000/year = $3,000
- Costs = $500 purchase + 3 years of maintenance at $100/year + $250 training + $500 ramp-up time = $1,550
This is an example of a high positive ROI, because savings far surpasses costs. Or, to revisit the investing analogy, would you deposit $1,550 in the bank to have it be worth $3,000 three years later? You bet you would!
The Better Investment?
So which is the better investment, CAD Software Z or Utility X? Utility X, no doubt about it. The ROI is both positive and high, the money spent to get the return is lower — and costs drop over time, since maintenance support for Utility X is much lower.
There are a few important lessons to be learned from these two example scenarios, which I’ll summarize here:
Some investments are losers. In the case of CAD Software Z, there’s simply no way to get a positive return unless the savings are much higher. CAD Software Z is simply a bad financial decision.
It pays to keep costs down. All things considered, management doesn’t like to spend money, so anything you can do to reduce annual costs is a good thing. In our example cases, Utility X keeps annual costs down at $1,550, whereas Software Z costs $4,500. So even taking ROI out of the picture, your boss would like Utility X better because it is cheaper to own.
If nothing else, lower software costs. If you can replace high-cost software with something functionally equivalent, you get the same results for less money, and that’s clearly a cost savings. Even in cases where the replacement program doesn’t save any time, ROI can still be increased based on lower software costs alone.
Don’t be a tool worshipper — let the tool fit the task. Think you need an expensive CAD program to read a file and extract basic data? Wrong! Viewers and utilities can do that sort of task. Think you need another seat of expensive software for your staff just because you hire someone new? You might — or you might not. The lesson here is: Don’t use a super-expensive tool to do a basic job when something less expensive is available, and don’t increase software seat licenses until you know what new staffers will actually do.
I’ll now draw some conclusions based on our examples and general knowledge of the existing CAD software market:
Subscriptions can keep costs high. If you select a subscription-based tool to perform a given task, know that the expense will never go away — thus driving costs up over time. If you can purchase something that does not require a subscription, you can run it until it is obsolete and keep your costs lower — often much lower. Do the ROI, it never lies.
Savings must be ongoing. If the tools you license aren’t getting better every year, and thus generating savings, then that software isn’t generating a positive ROI, but a negative ROI. No savings, no ROI.
ROI can be increased via cost reduction. Continuing the logic of ongoing savings, it becomes clear that if software isn’t saving time, it isn’t producing a return — so cutting costs becomes the only way to improve the situation. Even if you improve a -60% ROI to a -40% ROI via tough price reduction negotiations, at least the ROI will be moving in the right direction.
Doing nothing can cost big money. Sometimes it is easy to lapse into a “we’ve always done it this way” mindset and continue along doing the same old tasks with the same old software — but is that making your processes any more efficient? No.
It Used to be Easy
In the old days of rapid CAD technology improvements, we could feel confident that paying an annual maintenance agreement would give us enough increases in productivity to justify the investment. After all, when new releases give you lots of new functionality, your users become more efficient as a result, and a positive ROI occurs. But in today’s world, where software improvements are often minimal and subscriptions are often expensive, it pays to watch for new ways to do business that can save money.
The savvy CAD manager has always kept a close eye on software improvements, but now it is more critical — both technically and financially — to do so. My hope is that this overview of how to analyze your software options via ROI methods can help you make better decisions for your company. Until next time.
About the Author: Robert Green
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on: July 2, 2019 - 11:17am