Our study on the ROI of IT + software showed an average 3-year total ROI of 278%.
While a 278% ROI is an interesting statistic, this study examines the underlying sources of information technology (IT) value creation and attempts to answer the following:
What Drives Technology + Software ROI?
Cloud Ratings reviewed 50 third-party ROI case studies. The 50 ROI studies were selected with a view to approximating typical IT spend by an organization.1
While each ROI case study was focused on a particular vendor’s product and therefore that product’s specific benefits, Cloud Ratings classified “line item” benefits into the following categories:
- Labor Productivity – for example, reduced employee hours required for a given task/function thanks to software automation
- Revenue / Profit Benefit – for example, a) increased sales once sales reps are less burdened by manual tasks or b) achieving higher gross margins through optimizations identified by Data + Analytics software
- Cost Savings – IT – for example, reduced hardware or duplicative software costs
- Cost Savings – General – for example, reduced materials spend through more efficient processes
- Security Enhancement
- Employee Retention
- User Experience
- Compliance
Following this classification process, Cloud Ratings merged the “line item” benefits to create an aggregate, weighted average of IT benefits received.
Enhanced labor productivity was the clear #1 benefit, representing 37% of the total benefit received.
Increased revenue and profit margins were the #2 most common, representing 22% of the total.
Reduced IT costs were #3, representing 20% of the total.
A reduction in other, non-IT operating expenses was the #4 most cited benefit.
These top 4 “line items” – representing 92% of the total ROI – all have a very clear relationship to a profit and loss (P&L) improvement.
Improved IT security represented 6% of the total benefit received despite security products representing 12% of the study sample.
Harder to quantify IT benefits represented the remainder:
- Employee Retention – 1.3%
- User Experience – 0.9%
- Compliance – 0.3%
ROI Drivers Takeaways For Software Vendors
“Sell The Benefits That People Are Buying” – Market-leading vendors – like Microsoft and ServiceNow – successfully bring a P&L-focused message to IT decision-makers when selling their ROI. Benchmark your own ROI messaging to this study – over-indexing to “softer” benefits could represent a disadvantage.2
“What Is The Scorecard After The Deal Closes?” – The incentives of your buyers – both organizationally and personally, whether the sponsor or user – are aligned with having easily measurable and P&L-focused ROI “line items.” Said differently, clear financial benefits – like hardware cost reductions – allow individuals to hit their KPIs and the organization to fully believe it received a true ROI; whereas “softer” benefits – like improved employee retention which has many confounding variables – can be more easily dismissed.
Footnotes:
1. To roughly approximate the IT spending mix by the typical business, the 50 ROI report sample consisted of the following software product categories:
- Development + IT Management – 10
- Collaboration + Productivity – 7
- Security – 6
- Data + Analytics – 6
- Finance + ERP – 5
- Marketing – 4
- Service – 3
- HR + HCM – 3
- Sales – 2
- Industry Specific – 2
- Communications – 1
2. “Softer” benefits – like employee engagement or compliance – also create value and should not be ignored. In general, “selling ROI” best practices suggest “underselling” less quantifiable benefits within an ROI calculation. Why? An oversold, inflated ROI lacks credibility and is ultimately less effective. Moreover, the adage of “underpromise and overdeliver” certainly applies to customer success in software.