Software only makes sense when you expect >10x ROI (Return on Investment) 


Summary

How much should you spend on your internal software project?

Calculate your returns and cap your spending at 10% of that number.

Until you…

A) Realize the returns, and identify more steps you can take to get more returns.

OR

B) Realize your returns, and stop spending new dollars on that project, only spending a minimal amount to maintain the software.

OR 

C) Learn that you will not be able to realize the returns you initially projected. At this point you stop the project.


As an innovator, you are a value unlocker. Software is a tool. You succeed when you unlock value, not when you deliver working software.


Why Build Software for Your Business? 

If you have an innovative mind, you see possibilities and potential in your data and operations. You imagine a better way of doing things, resulting in happier customers, more engaged employees, and an attractive financial return.

You can’t help but to squint and see how you could combine your data in ways that drive results in your business.

Innovating and building software is hard. You are innovating into the unknown. You are exploring new terrain.

If there were a solution in the market that solved your specific problem, you’d use that solution. It’s cheaper and easier to maintain.

You know that before engaging in a Discovery Process (or writing a single line of code), it pays to do a returns analysis.

Go for BIG Returns or Don’t Go.

You want to identify BIG pains–places where meaningful value will be unlocked.

It’s not worth it to build software if you are looking to make a small change to something that is largely working.

Once you find a big problem, incrementally invest into the solution, validating returns at every step. 

Going BIG means going for big returns, not big spend.


Software should be a business model amplifier. Software is too expensive for small improvements that could be obtained faster with process or policy changes.


How Much Will This Cost?

How do you answer the question of exactly how much the project is going to cost?

The answer is you can’t exactly know, because in software development you will invariably find unexpected issues along the way. 

BUT, you can try this approach:

  1. Calculate the returns you will get if the pain you are addressing is solved. If you can’t calculate returns, it may be too early to invest in software.
  2. Cap your initial spend to 10% of estimated returns.
  3. Assess whether you are on track to realizing your returns.
  4. Keep going if there are more returns to be realized…OR…
  5. Stop if you find new information that indicates that you will not realize the returns.

ROI is easy when you have an expected return AND capped expenses.


How to Calculate Expected Return

You want to answer these questions:

  1. Will the returns be realized as increased revenue, cost reductions, operational efficiencies, or some combination of the three?
  2. Over what time period will the returns be realized?

The benefits of the software should be projected in financial terms. 

You can multiply your annual number by the number of years you expect to realize the returns. We recommend five years, as by then, things will probably have changed in your business.

Key factors for Retailers include:

  1. Increased Revenue: Estimate the additional sales generated from improved customer engagement and targeted marketing. 
  2. Cost Savings: Calculate savings for reduced labor costs due to automation, lower inventory holding costs, reduced losses, and improved supply chain efficiency.
  3. Operational Efficiencies: Quantify the financial impact of streamlined operations because of the software, such as faster checkout times, increased equipment uptime, and reduced stockouts.

Calculating Returns is Not About Precision 

Calculating returns before building software feels daunting, but it will save many potential headaches down the road.

The method you use for your calculations matters less than the fact that you are doing the exercise. Again, the goal is not precision, but rather to make sure you are pursuing worthwhile projects with a healthy margin of safety.

Innovating is hard; it’s also the lifeblood of lasting companies. 

If you have a vision you just know will make a difference, listen to your gut, and also do the work ahead of time to ensure your vision is fruitful and sustainable.

Cap Spend at Only 10% of Your Estimated Return

10x gives you the comfort that you can be off (as most humans are when we estimate) and still come out ahead.

The number 10 is somewhat arbitrary–but 10X gives you a very good Margin of Safety.

If you could guarantee that the project would have no surprises or unexpected turns, you could probably justify a lower return (or higher spend).

But that is not the experience of most people who have been building software for any meaningful period of time. 

Because you are investing incrementally, you can stop at any time, meaning you can realize returns better than 10X if you succeed at unlocking value earlier than you expected.

Validating Returns as You Go

As you build software, you can integrate the tracking of the proper KPIs (Key Performance Indicators) from the beginning, to continuously assess the value you are capturing.

Discovering Value: It’s About the Journey

True value discovery is not a static exercise. It is dynamic. It happens in practice. It cannot be done on a piece of paper as a one-time exercise.

You have to live in the data, ship a minimum viable product as early as possible, and iterate through entering the Build-Measure-Learn cycle.

It often happens that as you get into the project and start making progress, new areas of value are uncovered. You can apply the same 10% rule to those new returns.

Selecting the Right Project

Your project should have an absolute return that is large enough to matter to you.

This number is highly subjective, and it depends on the size and priorities of your organization.

For more ideas on the kinds of software projects that can drive meaningful ROI for retailers, we wrote a piece called  How to Drive 10x ROI in Retail Operations with AI + Geospatial Data.

Unlocking Value is a Contact Sport

We humans are bad at estimating. Estimating full software projects before you start often leads to disappointment.

Oxford’s Bent Flyvbjerg’s research shows that 99.5% of major projects fail to deliver their targeted results on time and on budget.

Software compounds the problem because you can only estimate for planned complexity

It’s impossible to plan for the inevitable accidental complexity, that is, the problems you will discover along the way.

This is why the 10% method works. You embark on the journey and get your hands dirty by working on the problem.

You win by doing. As one of our mentors once taught us: 

The magic you are looking for is in the work you are avoiding.


Unlocking value is a contact sport, not an academic exercise.


A Nod to Our Teachers

We owe a debt to our teachers. 

Many of the ideas from this blog post are based on the work of Vasco Duarte. Check out his book NoEstimates: How To Measure Project Progress Without Estimating.

We are also heavily influenced by the ideas in Eric Ries’s The Lean Startup, and we love finding ways to apply these principles to internal innovation projects.