Welcome, from Robert Green!
Over the years, I’ve written a lot about finding savings to provide a high return on investment (ROI) from your software licenses. In fact, it is a huge part of what CAD managers should be doing. Simply put, the smarter you are about squeezing all the savings you can while lowering the cost of your software, the more value you are generating for your company. And, I know your senior management would agree with me.
But what happens when the design software you use stagnates and no longer delivers new value? And, what happens when that same stagnant design software gets more expensive every year? This combination of stagnant performance and inflating prices leads to low ROI values and is often referred to as stagflation in economic circles. It is my conclusion that we are certainly experiencing this phenomenon in CAD software now. This edition of the CAD Manager’s Newsletter begins a series on practical strategies you can use to at least lower the cost. Here goes.
Image source: Dzmitry/stock.adobe.com.
Validating Via Polling
I believe the CAD software market reached the point of stagflation few years ago, but I didn’t want to write a series of newsletters without some validation of my view. So, I put out a polling question in my Facebook CAD Managers Unite group last month asking:
Is it just me or is the whole CAD/BIM/MCAD software industry in a sad, sorry, stale, stagnant state where the only thing increasing is the cost? See the breakdown of answers below.
- 24% Strongly agree — we feel like a hostage rather than a customer.
- 60% Little increased value but costs going up for sure.
- 7% Not my problem, I just use the software my company puts in front of me.
- 2% We don’t think about it, we just pay the bill.
- 2% There’s enough improvement to justify cost increases.
- 2% Software is improving all the time and costs are not a concern.
- 2% They develop faster than adoption providing solutions people don’t need.
No matter how you choose to view the problem, the polling results paint a picture where 24% feel like a hostage, 60% only see the cost increasing, and only 4% feel there is adequate improvement to not be concerned about costs. Not exactly a big vote of confidence for the CAD vendors is it?
The ROI Arithmetic
Before we can really dig into the idea of software stagnation leading to low ROI we need to define the terms.
ROI — Return On Investment. A way to quantify how well an investment is performing. In a software-centric model, ROI is typically derived by considering how much savings the software provides (via time savings) in return for the investment you make. Or, expressed as an equation:
In most cases, software generates savings via time and/or labor reductions (resulting from new, faster, and better software features) and that savings should exceed the cost of investment to deliver a positive ROI. Now let’s make the creative leap and conclude a couple things from looking at the equation before we proceed:
ROI is higher when you increase savings or reduce costs. Look at the numerator of the equation and realize that ROI is all about savings — no savings means no ROI.
ROI becomes negative as savings approaches zero. That’s right. Again, just look at the numerator of the equation. If something costs money (like a software subscription) but doesn’t return much (or any) savings, then there is no ROI — it simply becomes dead cost.
Costs vary. Sometimes software costs are just the subscription fee, but sometimes you may have IT installation costs or training that is also associated with updates.
Time spans vary. Most software will be in use for multiple years, so it usually pays to consider multiyear scenarios. In my experience, I find it useful to consider a three-year life span, simply because workstations tend to require updates at three-year intervals.
Example:
Company Z using Stagnated Software SuperCAD
Company Z does mainly repetitive design and their processes are well defined and understood. They usually update to the latest version every third year and even when they do, they tend to use it in the same way they always have. Each user requires a $2,000 per year subscription to use the software.
Because Company Z isn’t reaping any benefit from new functions, they are not generating any savings from new features in SuperCAD, but on the other hand they also don’t have to spend much on training and IT labor. But, the unavoidable fact is every user has a cost that repeats every year. Now we can compute SuperCAD’s ROI as follows:
- Labor Savings per user per year = $0
- Software subscription per user per year = $2,000
- Training costs per user per 3 years = $250
- IT update labor per user per 3 years = $250
Let’s look at the ROI computation for a three-year period like this:
Savings = 3 yrs $0/year = $0
Costs = 3 yrs subscription @ $2000/yr + $250 training + $250 IT = $6,500
Total ROI = (Savings-Costs)/Costs = ($0-$6500)/$6500 * 100% = -100%
And, yes, this is a perfect example of a negative ROI because we will never save more than we spend. Ask yourself this question: Would you continue to put $2,000 per year in an account where you made no return and lost your $2,000?
Why Is This Tolerated? Why Not Change It?
The example case we looked at is repeated in companies all over the world every day. Many companies will say they understand how much their software costs are and will even concede that they aren’t getting much for their money (see survey results above). So, the logical question becomes: Why is this tolerated?
Here are the answers I get when talking to CAD/IT managers:
- “The software we use has no alternative — we can’t replace it.”
- “It’s just a cost of doing business.”
- “It would take us too much work to change anything in our environment.”
- “Our users are comfortable with what we have, so why rock the boat with anything new?”
Let’s examine what these answers might mean in the context of and ROI computation and assign a bit of homework while we’re at it.
New ROI Factors
Let’s now look at each answer above from a different perspective: The perspective of lowering cost. After all, if you can’t make the software perform better to generate savings, at least you may be able to spend less in the process. But how? Let’s start doing the homework:
“The software we use has no alternative — we can’t replace it.”
Analysis: Many times this is true. Highly specialized and customized tools such as Revit, Solidworks, Civil 3D, and the like, can indeed be hard or impossible to replace without prohibitively high implementation and training costs.
Homework: Rethink project teams to lower the number of seats required. Be honest, does everyone in your design team really need all those software tools?
“It’s just a cost of doing business.”
Analysis: This is one way to look at it, but the question then becomes how long will the cost be manageable?
Homework: As a thought experiment, ask yourself how your company would function if you had to make a change?
“It would take us too much work to change anything in our environment.”
Analysis: I’m of the opinion that this reasoning is often used as an excuse to avoid work. I know this sounds harsh, but the fact is changing things does take work, so if the boss is willing to keep paying the bills, why bother, right? But, what if the boss wants to stop paying the software bill?
Homework: Look around for software that offers similar functionality that could be utilized, if you were willing to undertake a manageable amount of work to make the switch. See if the resulting ROI might be positive?
“Our users are comfortable with what we have, so why rock the boat with anything new?”
Analysis: This argument has to do with employee retention and can be a very valid reason for not making large scale changes to your CAD software environment. However, I’ve seen companies where some business units can make cost saving changes while other business units can’t. While I do agree that making ill-considered software changes can create upset users, it doesn’t mean that all users would be upset.
Homework: Divide up all your users into logical groups of business units, or remote offices and ask if there are any software changes you could make in certain locations that could create savings?
Summing Up
Hopefully, these examples have given you a different perspective on how to approach the problem of stagflating software. Now, take some time to do the homework and write down your findings. We’ll be using what you learn in next month’s installment of the CAD Manager’s Newsletter to chart the course for reduced software costs. Until next time.
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