How to Buy the
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Chapter 5: Building a Financial Case

At this point in your journey to buy a new software solution, you should have:

You are now ready to quantify the expected benefits into a monetary amount to justify the software purchase, a critical and often required step.

Work With Your Executive Sponsor

Meet with your executive sponsor to find out the justification needed for purchase approval. Your executive sponsor will know what is required and may also be able to provide examples of similar justifications successful in the past. Confirm that the justification demonstrates how the software will address the company’s goals and the executives’ needs and motivations.

Two Key Parts of Your Financial Case

Quantifying is challenging but necessary and doable. If your team has done a good job at business needs identification, then you should have agreement that you need a solution and it is “worth it.” But gut feel, even based on past experiences, isn’t what executive sponsors and CFOs want.

The financial case should include two components:

  1. Quantification of impact
    This is a believable calculation of how the company will benefit from meeting the business needs with the proposed solution. You will be making assumptions and estimating the impact based on changes to your business processes. Assumptions and estimations, though, should be defensible.
  2. Business justification
    This is a succinct statement of the business needs and perceived business improvements that will be used to measure the impact of the solution. A brief and well-thought-out statement will help gain approval. Once you have the quantification of impact, you can combine that with your business needs to construct a short justification. Looking ahead, your business justification can be used to message with stakeholders and users during implementation and after for continued support.

Quantification: Increased Revenue and Lower Costs

Think about the financial-benefit factors of this project as a sum of two components:

Increased Revenue + Reduced Costs

Increased revenue for most companies comes from selling more products, improving customer retention, accelerating fulfillment, providing more predictable cycle times, and improving collections.

Reduced costs impact a company’s bottom line. “A dollar saved is a dollar earned.” As discussed in the first chapter, here are some possible areas where costs can be reduced with better information sharing and automation.

  • Team effectiveness costs: inefficiencies, inaccuracies, miscommunications, lack of trust, new-user training
  • Failure and recovery costs: poor product quality, business delivery problems, service and support issues
  • Opportunity-lost costs: more inventory turns, what could you do with faster and more accurate processes?
  • Brand/customer relationship costs: what impact have product launch delays or quality problems had on your brand or customer satisfaction?
  • Installed system costs: if you replace older client/server software, the savings yielded by eliminating software support and maintenance, hardware and infrastructure investments, and personnel required to keep the software system working

Identify the Processes You Expect to Improve

Revisit your business needs and requirements by listing all processes that can be improved with the proposed software investment. Usually, better information sharing and more automation speeds processes and reduces errors. This frees up your teams to do more value-added work.

For each process, you want to measure the cycle time and error rates. And any manual or duplicate data entry processes that can be replaced with an integration will help eliminate errors.

At this point, you should assign a dollar value to expected improvements. Remember both factors: increased revenue and reduced costs.

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Insider Tip

To make quantification believable, you need improvement metrics. Ask vendors for case studies or benchmarks from past implementations to give you an idea of the potential for improvements. You can also look to third-party research and analysis for case studies on costs of bad processes or expected improvements.

Target Improvement Metrics

Estimate the expected improvements by determining a range based on best, expected, and worst-case improvements.

Translate Into Financial Benefits

To do this, talk with people in different roles who understand how each process contributes to the business. You will also need some basic company financials such as company revenue, cost of goods sold, gross margin, and daily team expense (employees). Your formulas will vary depending on both your business and what business needs you are impacting. Our examples are for product and quality business needs for product companies.

To calculate possible financial benefits based on your particulars, use this easy calculator for product and quality business needs.

Consider Existing Solution Costs

If you are replacing an existing solution, you need to add those related cost reductions to the calculations. For example, if you have on-premises client/server software, calculate the total cost annually for software, hardware, and upkeep, including FTE resources, particularly for homegrown solutions that require continued oversight. If you have a mismatch of off-the-shelf tools and manual, the actual software used may cost you little today in hard dollars.

Intangible Benefits

As well as hard dollar improvements, consider these benefits of having the solution you need: ability to respond to changes, be more competitive, and have better decision-making inputs.

  • Ability to respond: The right software for your business needs should scale up (or down) as your company’s needs evolve. Your company may have plans for continued and sustained growth (e.g., more products, higher volume, acquisitions, expanded services). And you may need to adapt quickly to external threats and opportunities.

    How do your processes scale with existing technology, personnel, and other resources? What parts of these processes are manual and not repeatable? What could be automated to help your teams address higher-level issues instead of routine administrative work? Contrast this with the new proposed solution. In general, your goal is to increase resiliency: the ability to handle the ups and downs in business cycles.

  • Competitive position: Do your competitors use newer or more automated technologies? Are you using emails, spreadsheets, or on-premises software (client/server)? To stay ahead of your competition, you must continually explore new ways to gain a competitive edge in the marketplace.
  • Decision-making inputs: Are decisions made using the most accurate and current information? Cloud software solutions eliminate silos and confusion. They help you measure performance in real time, providing decision-makers with better insights to improve business processes. For instance, you might discover process bottlenecks or learn about extra production capacity. Better information means better decisions.

It’s unrealistic to place an exact dollar value on any software solution’s ability to improve these intangible areas. Yet, you should include these benefits in your justification.

Return on Investment (ROI)

Return on investment describes the financial benefit relative to the investment cost. At its simplest:

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

ROI looks at:

  • Initial investment costs for solution: for SaaS, first-year subscription costs, services, training
  • Yearly costs: for solution after first year
  • Benefits: initial and continued
  • Payback period: time needed to recoup initial investment costs
  • Cumulative ROI: for enterprise solutions, the time period is often 3-5 years

EXAMPLE

Real-World Example From a Medical Device Company

Potrero Medical reported their ECO (engineering change order) cycle times were shortened by 30% using Arena’s cloud-based quality management system. For product and quality management processes, you can see more benchmarks in these customer stories. Let’s look at how you might build a financial case for this business need.

Identify Processes to Improve

Automating ECOs, like Potrero Medical did, impacts business in three ways.

  1. Increased revenue: faster ECOs means faster new products and features to market. The better the product—the more products you can expect to sell.
  2. Decreased costs: faster ECO processes means correcting product or quality problems faster. Often, products built with errors or other issues cannot be sold, which often results in recalls, mandatory rework, or scrapped product. This expense is a direct bottom-line hit. So, finding and fixing product problems faster reduces that cost.
  3. Ability to scale: more product types or increased production volume often requires more employees and partners to collaborate throughout ECO review processes. The ability to get everyone’s feedback and input into the change without slowing down approvals is key to meet demand.

Target Improvement Metrics

  • Expected: looking at the vendors’ case studies (such as Arena’s), improving ECO cycle time by 30% is the average improvement.
  • Best case: given that the team uses email and spreadsheets now, with a lot of manual inputs and serial signoffs, we think best case is 45% improvement.
  • Worst case: we recently re-engineered our ECO process by redesigning the form and using ad hoc tools that we already have in-house. That improved our ECO cycle time by 12%. So, we may only get 15% improvement.

Translate Into Financial Benefits
Ideally, you would model expected, best, and worst case. For the purposes of this example, we’ll use worst case for target improvement metrics, which is 12% ECO cycle time improvement.

  • Sales reports that they could sell 0.2% more products with 12% faster new feature releases. And, they added that a more predictable release schedule would improve that even more.
  • Manufacturing reports that they could reduce scrap and rework costs by 7% for 12% faster ECOs.
  • Engineering can speed approvals of cost-reduction ECOs in their backlog that represent $80,000 in cost of goods sold.
  • Both engineering and manufacturing agree that an online, connected system for ECOs would better support the planned growth to develop, test, and ramp production of new and improved products.

Return on Investment (ROI)

For our scenario, assume the favored solution costs $95K annually, plus $15K startup costs in the first year.

ROI = (Gain from Investment – Cost of Investment) / Cost of Investment

3.14 months = (456,000 – 110,000) / 110,000

If the numbers above are valid, you will easily make that investment back within a year—in fact, in less than four months, and your cumulative ROI over five years will be 444%. You can calculate out your yearly costs against continued investment gains and build a sophisticated ROI model if necessary with this template.

Meet With Finance

You’ll want to validate your findings with the finance team. Share your assumptions, perceived benefits, and justification. Finance should be able to check the company metrics as well as provide any other details you missed. In addition, this discussion provides an opportunity to prepare finance for a possible purchase and for you to verify any additional information finance will need for approvals.

Chapter Activities Summary

✓ Calculate ROI for a solution
✓ Review ROI with finance

Next Chapter: Selecting the Winning Solution
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