A cost/benefit analysis should always be part of any software system evaluation. Without performing this exercise a decision may be made based on the wrong criteria. The majority of the costs in a software system implementation occur on the front end while the benefits are realized over time. A system that appears less expensive in the short run may actually be more costly in the long run and vice versa. So it’s important to identify and quantify both costs and benefits. Then an informed decision can be made regarding the impact of implementing the system.
Cost Factors
There are several costs to consider when evaluating a new software system. Of course there’s the initial purchase price of the system but there are many other factors to consider. There may be additional equipment costs. Newer and more powerful computers may be needed to run the system. Stronger and faster network and/or Internet connections may be required. Training will be required and in many cases this can be the biggest cost absorbed during a system implementation. Not only is training an item that’s paid for but when people are training they’re sometimes taken away from their regular responsibilities. There may also be data conversion involved if the system is an upgrade from another one. And there will likely be ongoing maintenance and support payments required. Last but not least, there will usually be a productivity drop immediately after a system is implemented until people become accustomed to it.
Benefit Factors
The benefits of a new system can be extensive and can impact many aspects of a business. A system can have a positive impact by reducing costs and/or by improving sales. At an operational level productivity improvements may be realized and cost reductions gained. Unnecessary steps in processes and duplication of effort can be eliminated. At a business development level, sales can be increased as a result of information being more readily available or being organized and presented in such a manner as to better support the sales process. At a management level, a system can enable better decisions by providing the right information in a format to support running the business. All these areas can be impacted and identifying the specific areas where benefits can be recognized and quantifying them will provide the necessary information for this part of the decision.
The Analysis
Once the cost and benefit factors have been identified dollar values should be assigned to them. Most of the cost factors will be in the beginning. The benefit factors should be stated in monthly terms. This way the return on investment can be evaluated. The first thing this will project is the breakeven point. How many months into the future will it take to recoup the initial investment? Then the analysis will indicate the net benefits to be recognized over the useful life of the system. These are very important points to consider. If the breakeven point is too far into the future then the system may not be a good investment. Also, the benefits to be recognized over the useful life of the system should justify the investment.
Other considerations
It should be stated that benefits are not always monetary and may not be quantifiable in terms of business impact. For a small business owner a system may allow for more personal time which is hard to put a price tag on but no one ever seems to have enough of.
Conclusion
A software system is an important investment and care should be given to make sure the best decision is made. A detailed cost benefit analysis should always be part of the decision.
