If you’re a manager, you know that ultimately, every action you take on a day-to-day basis needs to be adding to the bottom line of your business. To add to the bottom line, you need to do one of two things: increase sales or decrease costs. In this article, I will detail how focusing your efforts on building practical solutions through custom software development can give your profit margins a dramatic boost.
In my experience, there are many steps people can take to reduce costs. They can hire cheaper labor, purchase cheaper materials, or come up with ideas to prevent mistakes and waste. They can also buy expensive equipment to try to pound out widgets faster, or could do things like spend money on employee morale to reduce turnover – there’s a lot of options.
But the truth is, most of these are pretty obvious. If you’re a smart business, you’ve already taken steps to implement the obvious ideas. Everyone knows that if you buy cans of Coke and keep it in the fridge in your office, you add that tiny .00001 percent increase in employee morale that means that people will quit for greener pastures that much less often. Everyone knows this, everyone does this – it’s not rocket science.
It’s also worth pointing out that for the most part, these obvious solutions have some pretty serious drawbacks. For instance, if you fire all your top-tier staff and hire lower wage workers to try to reduce costs, you’re going to experience a pretty drastic drop in quality, customer service, or something else important.
On the revenue generation/sales side of the equation, there is an entirely different set of options to make more money. You could decide to increase the ticket price of the items that you sell, spend more money on advertising, enter a new market, develop a new product, or add some new features to your existing products so you can challenge competitors.
While these are all valid options, a lot of them are difficult to pull off. Taking a new product to market can take years to figure out just how to launch, and can be very risky. Just ask “New Coke” – they spent millions if not tens of millions of dollars developing New Coke, and it was all a waste.
So, if reducing costs through simple changes has already been done or has too many drawbacks, and it’s too complicated to increase sales by launching new products, what can a business do to increase profits in a more practical way?
Decision makers may not know what types of problems they can solve with custom software – most people don’t.
Many managers we talk to don’t really think of developing software as an answer to this dilemma – they think software is only for addressing generic problems like inventory tracking or CRM. Decision makers may not know what types of problems they can solve with custom software – most people don’t.
The second problem we hear is that even if a company knows they need custom software, they may not be sure exactly what they should be trying to fix. Sure, they like the idea of having something that is tailored to their needs and allows them to take their unique value proposition to the market, but what aspects of their overall business processes need help? What tasks do their employees perform on a daily basis which could be made more efficient?
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A Real World Case
Let me give you an example. One of our past clients was in the business of heavy machinery. It was mandated by the government that they inspect and repair this machinery on a regular basis for their customers. When those inspections occurred, a lot of documentation was generated that was shared with customers and the government. At the time a department of five employees was managing the records keeping of these inspections for approximately 5,000 customers. As I’m sure you can imagine, this meant thick stacks of paper for each customer, as well as numerous Excel sheets floating around to try to keep track of what had been done when. In fact, I recall being shown a 6′ x 6′ file cabinet that was full to the brim with fines from the government.
In their particular situation, they were not able to keep on top of the record-keeping and communication that was necessary with the government, which meant that when we entered the scene, they were paying approximately $2,500,000 in fines per year.
We had numerous meetings with this client over a period of several months, and worked with them to design a solution. In a nutshell, what our solution did was allowed the client to know which records needed to be addressed immediately in order to avoid impending fines.
In the end, our client spent around $150,000 with us, and got their fines down to a manageable $50,000 per year. And that 6’x6’ file cabinet ended up having a lot of empty space in it, in fact after we launched the application, their fines could fit in a single folder. For those keeping track at home, that’s approximately a 1,600% ROI in the first year.
So how can you look at your business processes and the tasks that your employees do every day and figure out how to get this kind of ROI with custom software?
Figuring Out Where to Find ROI
One of the easiest approaches to take is to conduct what I call a task breakdown audit. What you do is sit down, and for a specific job role in your company, write down every type of task that person does in a given week. Create a column for each task, and assign a count of minutes or hours to each task, making sure that the total number of hours and minutes adds up to 40. Then, write a percentage next to each task, that represents the percentage of each week this task takes. Next, multiply that person’s yearly cost to your business (meaning salary plus benefits plus overhead) by each percentage and enter that cost on each line.
A fully completed example might look like this:
Job Title: Contract Administrator: Yearly Cost $80,000
– Review new incoming contracts: 2 hours = 5% = $4,000
– File new contract: 2 hours = 5% = $4,000
– Send contract for revision to staff attorney: 6 hours = 15% = $12,000
– Receive revisions from staff attorney: 6 hours = 15% = $12,000
– Send revised version to customer: 16 hours = 40% = $32,000
– File signed contracts: 2 hours = 5% = $4,000
– Answer customer questions via phone: 2 hours = 5% = $4,000
– Answer customer questions via email: 1 hour = 2.5% = $2,000
– Work on standard contract templates: 1 hour = 2.5% = $2,000
– Negotiate contract terms: 2 hours = 5% = $4,000
For the purposes of this example, let’s assume there are 6 Contract Administrators in the department.
What stands out here is the 40% time that these folks are spending on gathering up the revisions from the staff attorneys and sending those changes to the customer. All in all, the department spends approximately 6 x $32,000 = $192,000 a year on this type of activity.
What I would then do is talk to the contract administrators and ask, “Why does this take so much time?” Often, these types of users will be doing this process entirely manually, or at the most have Microsoft Word as the main tool they are using. By poking and prodding and asking some questions about the type of work they do, in many cases we might find that if they had a tool that could automate the more obvious steps in their process, and handle the “lowest common denominator” types of issues these users run into, it would cover a significant portion of their workload.
So, let’s say in this case we identify that if there was a way for the most common revisions staff attorneys make to just automatically get added to a contract, and be automatically sent to the customer, it would cover about 50% of the revisions they have to deal with.
(What I often find in these cases is that the 80/20 rule applies – most of the time the number would end up being more like 80% of their time is spent on mundane, easily-automatable cases, and only about 20% of their time is spent on the really high-value work that makes their position worth having. But just so our numbers are more believable, let’s go with 50%.)
Off the cuff, let’s pretend that it would cost $60,000 to build such an app, and take 4 months to build.
The formula for ROI then looks like this:
– 6 Contract Administrators spending 40% of their time costs $32,000 x 6 = $192,000
– Of this $192,000 the software can only handle 50% of cases, meaning $96,000 worth of cost
– Assume that once deployed, the system will be used for 10 years
Obviously, based on these numbers, the $60,000 investment will be recouped in year one, and over the life of the product it will save the company $900,000.
That’s about a 1,500% ROI. Try achieving that kind of ROI just by running a new ad campaign!
Using this approach, managers can identify practical areas where they can boost their profits by leveraging custom software. But there is one more hurdle that we often hear from managers that we have to get over before we can deliver this kind of value.
What folks often say is, “Sure, on the surface it looks like we would achieve significant gains by building this, but what about the risk that the project runs over, the developers don’t deliver, and we end up paying tens times as much as we thought it would take?”
What I have found in the market is that with many software development consultants, this is a common occurrence – ours is an industry that rarely lives up to commitments, which is evidenced by the fact that up to 80% of software development projects fail (a staggering statistic for the uninitiated).
Most people will tell you that these projects fail because of a lack of communication and lack of talent on the software development team.
At Unstoppable Software, we’re so confident in our skills and our ability to communicate with our client partners that we offer The Unstoppable Guarantee – which says that we will deliver a successful application that meets the business needs as specified, at the cost promised in our proposal, GUARANTEED.
So – the next time you are looking to boost margins in your department, sit down with your staff and run through a task breakdown audit. You may just uncover some new ideas that you could build amazing solutions around.