Budgeting for Business Software

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At Capterra, we allow buyers to submit their software needs which we then pass along to relevant vendors.  The buyers often enter a low-ball estimate on their budget line.  They do this because they are either unsure of what to budget or because they (understandably) don’t want to tip their hand.  However, when vendors see these low budget estimates they often don’t even want to talk to these buyers, because they think they aren’t serious or legitimate.budgeting business software

A low-ball negotiation strategy is one thing, but just taking a low-ball guess is not the smart way to buy business software.  Plenty of surveys have shown that many software buyers experience unexpected costs that add considerably to the final price tag.

The process of budgeting for software products for your business will vary tremendously based on what it is you are trying to automate.  However, one of the most important foundations of budgeting accurately is to know exactly what you need.  If you are researching an expensive product or anticipate needing a lot of customization, knowing what features are “must haves” and “nice to haves” will help you tremendously in your negotiations.  Once you have decided exactly what you need from your software solution, let these next three topics guide your budget brainstorm:

1)  If you are not using software, what are you already spending on the task the software will replace?  This is quantified most easily in payroll hours devoted to the task and the opportunity cost of not using the software.  If your sales team is preoccupied by this task, the revenue lost while they were distracted from “selling” is your opportunity cost of not using software.

2)  Second is the Total Cost of Ownership (TCO).  This is a financial estimate used to determine the direct and indirect costs of a new product.  Most components of this calculation, like the license or customization fees, will be fairly obvious.  It’s important to really try to include every cost derived from software ownership in this estimate.  Here are some examples of ‘not so obvious factors’ you may need to consider:

  • Will you be running parallel systems during the installation phase of the new system?
  • If not, will there be downtime between when you stop using the old and start using the new system?
  • What is your backup plan if the system fails?  Will this plan require ongoing preventive or security costs?
  • Will there be on-going compliance costs?
  • Will the system require employee training?
  • Will you need to consider extra data protection?
  • Will the data migration between the old and new systems be difficult or costly?
  • Integration costs: Will the new software integrate with other software solutions you already have?  Will you need to upgrade any of these existing solutions to be compatible with the new software?

3)  After you have thought through the costs, it’s time to remind yourself why you need this software solution.  It’s time to estimate the ROI of your Software Solution.  What will be your savings in operating costs over time?  What is your estimate for the additional revenue and cash flows from using the software?  If you need more help in justifying the cost of your software purchase, check out our Software Buyers Resources article.

Thinking through these steps will help you make a smart decision for your company.  You’ll have a better idea of not only what you need from the software solution, but you will also feel more secure with your decision when you start to negotiate with vendors.  Whatever budget figure you decide to tell vendors is totally your prerogative.  Just remember that the smartest deal is not necessarily the cheapest deal.

Looking for software? Check out Capterra's list of the best software solutions.

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Capterra

Capterra

At Capterra, we believe that software makes the world a better place. Why? Because software can help every organization become a more efficient, effective version of itself.

Comments

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An article complimenting what you said above can be found at: http://www.infoverto.com/2009/10/erp-strategy-move-to-maximize-roi-in.html

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Thanks for your input, Puneesh!

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Excellent points Alexandra. I am a big promoter of focussing on ROI in addition of the TCO of an application and agree with you comepltely. There are few other points from operations perspective that should be part of overall software evaluation, like:
1. How many more customers we can serve in same period
How many more products or services we can sell using the system
2. How can the system help me improve my margins (yes, it can)
3. How much reduction I can see in my administration costs and inventory costs
4. By what amount I could reduce my working capital and
How transparent and compliant are my operations now…

Thanks,
Puneesh

[…] This post was mentioned on Twitter by Alexandra Tambellini, George Valenzuela. George Valenzuela said: RT @Capterra: Three must-have discussion topics when forming your business software budget http://bit.ly/aQQAnk […]

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