How to Justify Software Costs Without Speculating About the Value-Add

As a product leader, your best approach to solving a problem is often to buy something off the shelf. Analytics, live chat, and project management tools are common examples. 

When building a business case to get your spending approved, justifying the investment’s ROI is one of the hardest things to do. 

Not only is it challenging, but you’ll also be making a load of assumptions along the way.

The automatic response is to quantify impact by estimating the value generated. For example, increasing engagement, reducing churn, improving conversion rates. 

This route leads to debating the merits of your assumptions. Most times, there’s an easier way. Many of these decisions are justifiable on cost savings alone.

How many hours a month are you going to save? What’s the cost of their time per month?

Sometimes that alone will exceed the cost of the solution.

If it doesn’t, try estimating the value of their time. If they reallocated the time you’re saving them, what value could they create? 

Known as opportunity cost, this is a measure of the value an asset (in this case, colleagues’ time) may otherwise generate. 

Reduce the opportunity cost of peoples’ time by identifying the most valuable thing they can spend their time on and figure out how to minimize time spent doing less-valuable work. 

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Buying off-the-shelf software is one of the fastest ways to do that. For company-specific problems, you might drive efficiency and/or automation by building an internal product. Shout-out to all the internal product managers!

Take this approach to the next level by playing conductor instead of a musician. Avoid estimating impact in isolation and risking the approval of your proposal hinging on decision-makers’ trust in your estimates and assumptions.

Instead, get the numbers from decision-makers, and calculate the impact together. You’ll have a much easier time getting your investment approved by directly involving the decision-maker in the calculation that justifies the decision. This is especially valuable for decision-makers you expect to resist approving your investment.

Case Study Example

At the very least, you’ve now got a new way of looking at your business cases by considering the costs saved rather than just the value generated. Let’s make it more tangible by looking at an example that might tempt you to use the traditional value-generation approach. Instead, we’ll walk through using the cost-saving angle. 

Let’s say your customer success team is getting a lot of inbound requests because of the rapidly growing user base. (A good problem to have, right?). They’re looking at procuring a customer support ticket software to handle the inquiries rather than the shared email tool they’re using now.

The adjusted numbers below should simplify the math while keeping things realistic.

Traditionally, you’d build your business case on the opportunity for adding value. For example, happier customers will be less likely to churn and therefore have an increased lifetime value (LTV). While that may be true, you’ll need to make a bunch of assumptions to get to a numerical estimation of that value. Additionally, you’ll need to find a credible source citing the quantitative impact. If you’re lucky, the software you’re trying to buy will give you the numbers on their website or via their sales team. The challenge then becomes, how do you convince the decision-making team that it’s accurate (especially given the inherent bias). Value-generation approaches will always be challenging to justify. 

If you’re stuck with leveraging a value-generation case as your only option, focus on exactly what’s required to breakeven (e.g., A/B testing software increases conversion rates by 0.05%). With a specific breakeven number, you can be more general in how much value could be unlocked (e.g., over 12 months, we think we’ll increase conversion between 0.50% and 1.0%).

Instead, consider how much time each team member could save. A good place to start is to work backward from the actual total cost. In this case, we’ll look at the annual cost. Take that cost and divide it by the number of team members (e.g., $20,000 / 10 = $2,000). Now we’ll want to use that cost per user to assess the productivity gains needed to breakeven. 

You’ll want to take your average team member salary and figure out what percentage the software cost represents (e.g., $2,000 / $75,000 * 100 = 2.67%). You now have the percentage increase in productivity needed to breakeven. 

Your question becomes, “will the support ticket software increase each team member’s productivity by at least 2.67%?”

A percentage of time isn’t very intuitive, so it’s often easiest to translate it to actual time (e.g., 40 hrs x 2.67% =  1.068 hrs). Now, your question is, “can each team member save more than 1 hour and 5 mins per year on average by using the ticketing software?” This version makes for a pretty straightforward business case, right?

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Your business case is now about justifying whether the time saved will confidently exceed your breakeven threshold. One place to start is surveying the team (without conveying that you’ll be calculating the business case using the number). It’s generally best to specifically ask for a bare minimum since that will increase stakeholder confidence in your analysis. Often, you’ll end up with such a big difference it’s a clearcut decision. For example, “if we were to bring on a high-quality support ticketing software, how much time at an absolute minimum do you think it would save you per week?”

When presenting your case, speak to the opportunity cost of the time you could be saving – by investing that time in other valuable work. You don’t need to calculate it, but convey that it’s a compounding benefit on top of your already compelling case. You’ll, of course, still need to factor in things like integration, security risk, fit for purpose, etc., but the core of your case is now covered.

Building a case like this for buying software is most obvious; you can also evaluate whether to build custom software in-house. Be sure to account for everything taking longer to build than you expect, and make sure you account for maintenance costs. One of your teams will need to be responsible for keeping the software running – you’ll want to account for dedicating some percentage of their time per year.

Now you’ve got an extra tool for building a business case that significantly reduces speculation and sets up a clear and concise financial justification. It’s often the only approach you’ll need but can be used in combination with value-creation to account for a portion of the cost. Protip: build your core cost-reduction case and solidify it by noting the value-creation opportunities without quantifying them – that way, you’re not speculating.

Meet the Author

Bryce York

Bryce York is a product leader specializing in growth-stage startups. With over a decade of experience, he’s now heading up product and design at Tatari helping ambitious startups drive and measure growth with television advertising. With passion for product, Bryce’s experience spans management consulting, founding three startups, and exiting one. Originally from Sydney, Australia he now call NYC home.

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