How do I perform a software cost benefit analysis?
Tuesday, September 7th, 2010 at
5:34 pm
I am a web application developer, and have been asked to show the monetary benefits for a client utilizing my proposed solution (a new application), in comparison to their current solution, over a period of time. What approach should I take to validate the cost savings in the long run for the initial expenditure and ongoing support? Is there a set of factors and formulas I can use to show this benefit?
Filed under: Tapit Software
The primary output of a cost/benefit would be expected cash flow expressed either periodically or at a point in time. You will have to complete the analysis to know which one to choose.
So in considering the costs for a new application, you should include development, project oversight, technology (hw/sw) and maintenance costs. You would likely be very heavy in upfront costs for implementation with significantly lower costs for maintenance after implementation.
Benefits should include both cost savings as well as productivity gains (e.g. increased sales). You should account for decreased headcount (fractional [1.5 people]is okay), higher output of current employees, removing hw/sw costs of the other application and anything else you could justify.
Create a monthly calendar (Jan, Feb, Mar…) for all of the costs and all of the benefits. You will likely see that initially the costs outweigh the benefits but eventually the benefits will "pay for" all of the costs assumed to that point and the application will then "pay for itself".
You would then consider the same factors for the other application and any other alternatives (use both, use neither).
I would recommend that you engineer the pay off for your application to be within 3 to 6 months, if at all possible. Your likelihood of success with a 12 to 18 month pay off will be substantially lower. If you find that the payoff really is that far out, you must be prepared to make the case why they would be using your application for an extended period of time. They will have to use the application that long for it to ultimately become beneficial.
With and extended payoff, another point you could make is that the business can "capitalize" the cost of your software and they would be able to receive preferential tax treatment on the expenditure. You should ask another question to get a clear explaination of this process.
Excel (or any spreadsheet) will make this task easier. But avoid using the spreadsheet for your presentation.
The cited article points out the innate flaws in these types of analyses but if they want it you are oblidged to provide.