ROI for Nonprofit Software perplexes leaders of many not-for-profit organizations. In a decision involving considerable costs, calculating the return on investment often proves to be elusive.
First, what is the calculation for ROI in this case? One equation is:
ROI= ((Gain on Investment − Cost of Investment)/Cost of Investment) x 100%)
Using a simple example, a gold coin purchased for $2,000 on January 1 is sold for $2,500 on December 31. The calculation would be:
(($2,500 – $2,000)/$2,000) x 100% = 25%
Therefore, for a $2,000 investment, $500 was earned, resulting in a 25% return on investment.
Calculating ROI for Nonprofit Software is more complicated because there are multiple inputs into both Cost of Investment and Gain on Investment.
For software, costs can fall into several categories:
While these costs can be quantified easily, other costs are more challenging to compute. For example, the learning curve time with the new software takes staff away from other things they could be doing.
Of the two inputs, Gain on Investment is tougher to determine for ROI for Nonprofit Software.
Gains can occur in two ways: Additional revenue and cost savings.
Additional revenue could come in the form of:
Another input to ROI for Nonprofit Software is cost savings. Examples include:
Imagine calculating Year One ROI for new software with these inputs:
Software License $5,000
Training/Technical Support Included
Learning curve (100 hours at $20 per hour) $2,000
YEAR 1 COST OF INVESTMENT $8.000
Software cost savings over existing programs $3,000
Donations increase $5,000
Operational efficiency (500 hours at $20 per hour) $10,000
YEAR 1 GAIN ON INVESTMENT $18,000
The resulting calculation is:
(($18,000 – $8,000)/$8,000) x 100% = 125%
Given the numbers in this example, it’s clear the new software has a positive ROI. However, unlike the $3,000 hard dollar savings of the software cost, increased donations and better operational efficiencies are estimated. Suppose these estimates turned out to be over-optimistic. According to the calculation, the breakeven ROI would be achieved if the combination of increased donations and operational efficiencies resulted in a $5,000 gain.
So, in this calculation of ROI for Nonprofit Software, if management believes the new software can realistically result in more than a $8,000 gain (savings, efficiency gains and revenue increase), then the new software has a positive ROI.
Suppose Year 1 ROI is negative. ROI should be calculated out further (e.g. – three years) because ROI could be positive despite a negative ROI in the first year. This is because some costs only appear in Year 1.
In calculating ROI for Nonprofit Software, leaders need to carefully consider all aspects of the proposed software purchase. They must make realistic estimates of costs and benefits as well as choose a reasonable period for the calculation. A precise estimate of ROI for Nonprofit Software will more likely result in a successful decision for the organization.