BUYING SOFTWARE?
How to calculate your best buy
By Robert D. Rocha

Software. With so many programs from which to choose, buying the best software package is a challenge. Each vendor makes claims that are very attractive.

Before you take out your checkbook, stand back, breathe deeply, and methodically evaluate your choices. The time you take before you buy will be time well invested.

Here are some tips that should help make your decision a more financially rewarding one.

IDENTIFY ALL COSTS

At first, costs — the sticker price — may seem apparent, but the more complex software packages tend to require you to spend additional dollars to maximize productivity while continuing to receive the latest software releases.

Some of the costs to inquire about include training, customization, maintenance, and support.

And remember that although a program that uses a patient database can be multifunctional (i.e., used for marketing as well as billing), transferring information may cause you to incur additional costs, such as buying support from the vendor or hiring a person to accomplish the transfer.

LIST THE BENEFITS

Benefits are either direct or indirect.

Direct benefits are easy to list because they typically occur at the time your new software package is purchased. For instance, when you buy a new software package, you may find you no longer have a need for some of your old software (because the new software addresses several needs) or perhaps some hardware. (The new software may operate well on a server and eliminate the need for more upgrades in expensive personal computers.)

Indirect benefits typically are experienced in the future. Some indirect benefits include increased efficiency or productivity, reduced head count (because of additional efficiency), and improved patient experience.

CALCULATE PAYBACK AND ROI

To make a purchase worthwhile, it should have a good return on investment (ROI) and payback period.

ROI gives you a simple measure of your return from an initial investment. The problem with using only ROI is that it does not take time into account nor how long it takes to get a return.

Should that period be one year? Five years? Longer?

Only you can answer that question. However, using formulas, you can compute a dollar value to help you evaluate the investment before making your decision.

Here’s an example:

Practice ABC is considering purchasing software from vendor DEF at an initial cost of $6,000, which includes one year of maintenance and support. For an additional $1,500, the vendor will provide onsite training. And for $199 per year, the practice can receive updates.

The total initial cost outlay (which includes training) comes to $7,500. Subsequent cumulative costs that include an annual upgrade fee of $199 are $7,699 for year 2; $7,898, year 3; $8,097, year 4; and $8,296, year 5.

The purchase of this new software package eliminates the need for an expensive computer and therefore allows practice ABC to save $2,000 up front.

Additionally, the new software package allows staff to be more efficient in their work. They focus more of their time and efforts on other tasks around the office, such as creating a better patient experience or collecting for services that often fall through the cracks. The expected result is an additional $10,000 in revenue at the end of year one.

At this pace we can calculate the payback period using this formula: Initial Cost ÷ Cash Flow = Payback Period.

Plugging in the actual numbers, the formula is: $7,500 ÷ ($2,000 + $10,000) = .625 of a year (7.5 months).

Now, let’s calculate ROI:

Let’s assume that the life of this software program is five years. The formula to calculate ROI is Net Benefits ÷ Initial Costs = ROI. Plugging in the numbers, the calculation comes to this: (5($10,000) + $2,000) ÷ $7,500 = 693% or nearly a 7x return on the initial software investment after five years.

However, this formula does not take into account the four extra years of support. The real ROI over a five-year period is (5($10,000) + $2,000) ÷ $8,296 = 627%. Even with the extra cost for annual upgrade and support added in, in this scenario the software purchase looks quite attractive.

Taking time to do the calculations will help you make the most of your software dollars. If you still wonder if the software is a good deal, talk with your accountant. He or she can put a sharper pencil to the paper.

Robert D. Rocha, president of CommVantage, Inc., has a background in biomedical engineering and software development. He can be contacted by phone at 813-902-8700, by e-mail at Robert@commvantage.com, or through the company’s Web site, www.commvantage.com.