When you ask for budget for a new tool, the question you will get is whether it is worth the money. For most business software the honest answer depends on one thing: how much time it saves, and what that time is worth.
The basic formula
Annual value is hours saved per week, times the value of an hour, times 52 weeks, times the number of people using it. Subtract the annual cost to get net value. Divide net value by the cost to get ROI.
Value of time saved
5 h × $50 × 52 wk × 1 userequals$13,000
Net value
$13,000 − $2,400equals$10,600
ROI
$10,600 ÷ $2,400equals442%
At that rate the tool pays for itself in a little over two months.
Small savings across a team add up
A tool that saves each person only an hour a week can still be an easy decision once a whole team uses it. Here is a $6,000/year tool used by 8 people whose time is valued at $60 an hour:
Value of time saved
1 h × $60 × 52 wk × 8 usersequals$24,960
Net value
$24,960 − $6,000equals$18,960
ROI
$18,960 ÷ $6,000equals316%
Putting a value on an hour
Salary divided by hours worked is a start, but it understates the real cost of an employee's time. Benefits, payroll taxes, equipment and office costs are commonly estimated to add 20 to 30% on top of salary. That fuller figure is called a loaded rate.
Keeping the estimate honest
ROI estimates are only as good as the hours-saved figure, and that is the number most likely to be optimistic.
- Time one real task before and after, rather than guessing.
- Assume not everyone will use the tool fully, especially in the first few months.
- Count the setup and training time as a cost.
- Run a pessimistic version too. If the tool still pays for itself at half the savings you expect, it is a safe decision.
Saved time only has value if it goes into other useful work. It is worth saying what the team will do with the hours, because that is usually what makes the case convincing.
Tip: Per-seat pricing grows with your team. Check what the tool will cost at next year's headcount, not just today's.