Gone are the days when the financial head of the company use to easily agree to the procurement of IT systems. Used to allocate a certain percentage of company’s expenditure to IT investments. Now, with a host of software companies mushrooming up information technology, managers are required to justify every penny spent on IT investments. Software companies need to understand the IT needs in the right perspective. This is where the Return on Investments analysis is being used to measure benefits derived from using the services of offshore companies.
Till the recent past, business did not realize the advantages using the services of offshore companies for their IT development needs. Nowadays, a lot of companies are going for offshore software development to boost their business performance. This helps save costs on their IT development and also give them an edge over their competitors. As they have lots of software companies to choose from, it is imperative to have right ROI calculated before making any purchase decision.
You can arrive at the ROI figure by dividing the net return from an investment by the cost of investment and convey it as a percentage. ROI is very popular metrics to measure benefits derived and can easily modify for different scenarios.
ROI % = (Return – Investment Cost)/Investment Cost x 100
Comparison of different project proposals demonstrates which software projects to undertake. ROI proves as a definitive guide to decision makers about which IT project investments would be beneficial to them.
There are two ways investments in offshore companies’ services can measure. They tangible benefits and intangible benefits. Tangible benefits are expressed in financial terms but later cannot be quantified.
Below are few financial benefits derived from IT investments. ROI should be based on such hard benefits.
Revenue Enhancement: This indicates what is increased in sales of the company
Cost Reduction: It gives an insight on reduction of cost or cost savings.
Cost Avoidance: This means a company can completely avoid making an expenditure.
Capital Reduction: It reflects decrease in expenditure on fixed assets
Capital Avoidance: Similar to cost avoidance it suggests avoidance of capital expenditure
Non-financial gains by procuring services of offshore companies are excluded from ROI calculation. But such benefits are equally important to make an investment worthwhile. Few examples of intangible benefits are mentioned below:
- Increase in customer satisfaction
- Better customer service and supports
- Increase in end user satisfaction
- Improved business processes
- Information storage and retrieval
- Better control over data
You have to consider following aspect while calculating ROI:
Timeframe- It may differ from project to project. Hardware projects may consider a technology as outdated in only 3 years, but a software system may run for 5 years or more. Changes in timeframe have a significant impact on ROI calculation. You need to be consistent as far as possible.
Consistency: ROI calculations should be applicable across all IT systems.
Accuracy: Try and be precise in your calculations as far as possible
Some of the measures which are byproducts of ROI calculation:
NPV: This measure indicates what you can get in return from project at particular discounted rate. Positive high value indicates that an investment can be justified.
IRR: It is known as the yearly yield on %of investment. Higher the figure suggests a favorable scenario.
Payback: It is conveyed as the number of years it takes to recover the investment. Also known as break-even point. If the payback period is shorter, it’s considered as favorable to invest. Software companies should try to complete projects which as short as possible payback period.