Return on investment (ROI) is a key metric that determines the success or failure of a software development project. For software companies and IT departments undertaking development projects, accurately measuring and maximizing ROI is crucial. This article will provide a comprehensive overview of ROI in software development by exploring key areas.
By the end, you will fully understand how to maximize and measure ROI at every stage of the software development lifecycle. Achieving the highest ROI on software development projects provides tremendous competitive advantage and cost savings for any organization.
Defining ROI in Software Development
Before exploring maximizing calculations in software development, it helps provide hard numbers around the value created by software investments. It indicates whether building a particular technology solution results in increased efficiency, revenue, cost reduction, or other financial benefits. It is important to precisely define what constitutes a return on investment in software development.
What is ROI in Software Development?
ROI measures the amount of return on an investment relative to the investment’s cost. In software development, ROI is used to evaluate the financial benefits delivered by a software application against the total cost to build and launch it.
The ROI in software development calculation helps provide hard numbers around the value created by software investments. It indicates whether building a particular technology solution results in increased efficiency, revenue, cost reduction or other benefits that exceed the required investment.
High ROI software projects are those that deliver significant business gains at a relatively low overall spend.
ROI Calculation Formula
The basic ROI formula commonly used for software development ROI calculations is:
ROI (%) = (Net Benefit ÷ Total Cost) x 100
Net Benefit = the returns attributable to the software investment minus the costs. This equals the total measurable financial gains enabled by the software.
Total Cost = all costs associated with the software project, including development, testing, deployment, licensing, maintenance, etc.
Using the net benefit and total costs in this ROI formula precisely indicates how much value is created per unit of investment in the software project
Hard Returns vs Soft Returns
The returns component used in ROI calculations for software development can be divided into:
Hard returns: Tangible, measurable financial gains such as increased revenue, cost reductions or productivity improvements. For example, a new e-commerce are intangible benefits such as improved customer satisfaction, employee morale, brand reputation, or compliance that platform generates $100K in additional sales.
Soft returns: Intangible benefits such as improved customer satisfaction, employee morale, brand reputation or compliance. These are difficult to quantify financially.
The most accurate ROI assessments will focus primarily on the hard financial returns enabled by the software application. However, larger business case justifications may also incorporate soft, intangible returns supported by the technology.
Importance of ROI in Software Development
According to the most recent prediction from Gartner, software development budgets worldwide are expected to exceed $5 trillion by 2024, up 6.8% from 2023. Given the size of the expenditure, software development must be as efficient as possible. In this case, ROI will help.
| 2023 Spending | 2023 Growth (%) | 2024 Spending | 2024Growth (%) | |
| Data Center Systems | 243,063 | 7.1 | 261,332 | 7.5 |
| Devices | 699,791 | -8.7 | 732,287 | 4.6 |
| Software | 913,334 | 12.4 | 1,029,421 | 12.7 |
| IT Services | 1,381,832 | 5.8 | 1,501,365 | 8.7 |
| Communications Services | 1,440,827 | 1.5 | 1,473,314 | 2.3 |
| Overal IT | 4,678,847 | 3.3 | 4,997,718 | 6.8 |
Taking an ROI-focused approach is critical for software success for several key reasons:
Financial Accountability
Software development projects require significant investments in money, time, and resources. Measuring ROI provides financial accountability and evidence that the value created justifies these substantial investments. If a project’s ROI is anticipated to be low, it may not merit approval and investment.
Objective Decision Making
Quantifying the business case for software projects in terms of ROI provides objective metrics for deciding which projects to pursue. Rather than relying on opinions and qualitative assessments, ROI numbers allow executives and IT departments to compare projects based on the expected cost/benefit tradeoff.
Target Setting
Establishing an ROI target at the start of a development project sets clear objectives for the returns expected from the software investment. The development team can then orient their efforts towards maximizing business value delivery.
Performance Tracking
Monitoring the actual ROI realized by software investments indicates whether these projects are returning to their expected level of value. Tracking ROI over the project lifecycle helps identify any shortfalls needing correction.
An ROI-centric approach is key to developing software that drives maximum business impact and return on investment. The next section explores specific steps to maximize development ROI.
Maximizing ROI in Software Development
Several best practices across the software development lifecycle can greatly impact ROI outcomes.
Requirements Gathering
Capturing accurate, business-focused requirements is essential for building software that enables financial returns exceeding project costs. Techniques for maximizing ROI at the requirements stage include:
Key stakeholder involvement. Directly engage the business, IT, and user teams that will benefit from the software. Capture their detailed input on required features to drive specific productivity gains, cost savings, and revenue increases. Commercial off-the-shelf software (COTS) can sometimes have other financial benefits.
Quantify expected returns. Document expected returns and tie these directly to software requirements. This connects the project’s ROI justification to business needs addressed by specific features.
Prioritization. Classify and rank requirements based both on development cost estimates and expected financial benefit to the organization. This allows intelligent scoping tradeoffs if needed.
Thorough requirements gathering focused on projected ROI establishes alignment between IT teams and business stakeholders on the path to maximize value.
Development Approach
The software development approach can also impact ROI outcomes:
Agile development. Agile methods that deliver working software in rapid iterations allow regular validation that features deliver their expected business benefits. Adjustments can be made quickly to maximize value continuously.
Outsourcing vs. in-house. The costs of offshore software development company vs. in-house development can affect ROI projections and outcomes. All factors, such as quality, timelines, and ongoing expenses, should be weighed.
Custom vs. COTS applications. In some cases, commercial off-the-shelf software (COTS) can provide faster, lower-cost paths to ROI compared to custom development. However, COTS limitations should be evaluated.
Optimizing the development methodology, resourcing, and technology decisions enables faster, more cost-effective building of higher–quality software, improving ROI.
Testing and Quality
Rigorous testing leads to higher quality, better-functioning software that supports increased business adoption and utilization. This amplifies financial returns from the investment. Steps to boost ROI via quality include:
Functional testing. Verify all features deliver expected functionality to support financial gains projected in requirements.
User acceptance testing. Validate usability and adoption of the application to confirm users’ projected productivity improvements.
Load testing. Test performance under peak usage to ensure system stability and prevent disruption of business processes it supports.
Software defects reaching production, performance lags, and user adoption issues have direct ROI implications. More complete testing aligns delivered value closely with projections.
Deployment and Maintenance
The final stages of deployment and ongoing maintenance also impact ROI outcomes:
ROI tracking. Once deployed, directly monitor business metrics tied to expected financial returns in requirements – e.g., sales increases, task efficiency, etc. This validates whether projections are achieved.
Ongoing investment. Provide adequate post-launch investments in maintenance, support, and incremental enhancements to sustain and maximize business adoption and returns over time.
High ROI requires appropriate support even after initial software delivery to embed the application firmly into business operations.
By applying these ROI best practices throughout development, software investments can fully capture both immediate and longer-term value.
Measuring Software Development ROI
While focusing on ROI across delivery, concrete measurement is required to track project performance against targets.
Key ROI Metrics
Key metrics for monitoring ROI in software development include:
- Net Benefits realization percentage. This percentage tracks total measurable financial returns attributed to the software against projections in the requirements and business case. It indicates whether the value is being delivered as expected.
- ROI % provides the headline ROI figure and the bottom-line assessment of the overall project return against investment. Trends vs. targets provide insight into performance.
- User adoption rates, or the levels of active usage and traffic for the application, impact the reach of financial benefits across intended users.
- Business process efficiency. Metrics indicate where the software has improved business workflows, activities, and tasks it supports, enabling financial gains.
- Issue resolution velocity is the speed at which issues that impact software stability, availability, and operation are addressed. Faster responses minimize disruption of financial returns.
Tracking these measurements provides a comprehensive insight into delivered ROI and overall business value.
Lifecycle ROI Monitoring
Monitoring ROI should occur both during active development and post-full deployment:
- Projected vs actual. Track projected ROI from requirements against actual observed financial returns realized from software features during development. Note any deviations from expectations.
- Post-launch tracking. Maintain ROI performance dashboards for 6-12 months after deployment to validate financial benefit projections are achieved and sustained once live.
Ongoing monitoring quickly identifies ROI delivery shortfalls needing correction or indicates when value fails to be maintained post-launch.
Addressing ROI Shortfalls
If tracked ROI measurements fall below targets at any stage, typical responses include:
- Feature adjustments. Enhance, modify, or add software capabilities to increase financial benefit delivery.
- Increased user training. Boost training and support to drive better adoption and utilization to capture projected value.
- Stakeholder engagement. Work with business teams to address process or integration issues limiting financial return realization.
- Development changes. Improve the agility of the maintenance team in delivering feature improvements/fixes.
A robust and ROI-focused monitoring process safeguards value delivery and provides the feedback loop to achieve overall project success.
Conclusion
Maximizing and tracking return on investment must be a central priority for any organization involved in building technology solutions.
Taking an ROI-centric approach throughout the software lifecycle ensures development initiatives drive tangible financial benefits that exceed their costs.
The ability to consistently develop and deploy applications achieving over 100% ROI unlocks tremendous competitive advantages for technology-driven companies. Following the blueprint outlined in this guide will enable any IT organization to maximize its software investment returns.
