Calculating the Return on Investment from ERP

Calculating the return on investment (ROI) from implementing an ERP system involves measuring the benefits and costs of the system over time. Here are the general steps to follow:

  1. Determine the costs: The costs of implementing an ERP system may include the purchase or licensing of the software, hardware, consulting fees, training, and maintenance costs.
  2. Calculate the benefits: The benefits of implementing an ERP system may include increased efficiency, reduced labour costs, improved inventory management, and better decision-making capabilities. Quantify these benefits as much as possible.
  3. Estimate the time to achieve ROI: Determine how long it will take for the benefits to outweigh the costs of the system.
  4. Calculate the ROI: Divide the total benefits by the total costs, and multiply by 100 to get a percentage. For example, if the total costs are $500,000, and the total benefits are $700,000, the ROI would be (700,000-500,000)/500,000 x 100 = 40%

It’s important to note that calculating the ROI of an ERP system can be challenging as there are often intangible benefits that are difficult to quantify. Additionally, the ROI may vary depending on the organization’s specific situation and goals.

To ensure an accurate ROI calculation, it is important to involve key stakeholders from across the organization and conduct a thorough analysis of the potential benefits and costs of the ERP system. This can help ensure that the ROI calculation is as accurate as possible and that the organization makes an informed decision about the investment in the ERP system.

Calculating ROI from an investment in ERP can be a significant challenge. As independent ERP consultants, we’re often asked about the concept of tracking ROI and inevitably the conversation leads to what returns to monitor.

Investment in ERP provides many opportunities for ROI calculation, both in estimating returns and calculating them, such as increased revenues, cost reductions, schedule performance, labor efficiency improvements, and quality improvements.

ROI can be measured by increased revenues, cost reductions, efficiency improvements, quality improvements to name a few.

3 Steps to Assessing ROI

Calculating ROI from an investment in ERP involves a three-part approach. To be most successful at managing changes to their business processes, companies need to:

  1. Make ROI calculations standard operating procedure in order to both justify projects and evaluate them upon completion
  2. Include all associated costs in your ROI calculations including internal staffing costs.
  3. Eliminate dependency on pens, pencils and spreadsheets. Utilize reporting capabilities of the system and supplement them with integrated business intelligence and event management for real time performance monitoring
  4. Without pre-defining the important metrics to be improved by the significant investment of implementing a new or upgraded ERP system, it will be difficult to determine if the investment was worthwhile.
  5. It will also be difficult to identify areas that must be addressed in order to achieve the desired results or to know what is working well.

Defining the business case as part of the ERP system selection process will provide information for:

  • Making a good selection of an ERP system
  • Aligning the implementation project and business transformation with the lifelines of the business
  • Monitoring the business as the implementation project moves through its phases
  • Defining the benchmarks of performance after implementation

Build the Business Case: In building such a business case, we look as various business metrics that include (but not necessarily limited to):

  • Acquire New Customers
  • Retain and Grow Current Customers
  • Leverage Income-generating Assets
  • Strengthen Pricing
  • Variable Cost Productivity
  • Fixed Cost Productivity
  • Purchase Price Deflation
  • Improvements in
    • Customer Interaction Efficiency
    • Corporate Shared Service Efficiency
    • Development and Production Efficiency
    • Logisitics and Service Position Efficiency
    • Income Tax Efficiency
    • PP&E Efficiency
    • Inventory Efficiency
    • Payables and Receivables Efficiency
    • Managerial and Governance Effectiveness
    • Execution Capabilities

The Value Map

Once this business case is developed, an Enterprise Value Map can be used to represent the case. A typical map would include reports/graphs to support the details before and after implementation. The map is just one supporting document to build the business case as part of the business analysis process. By taking this approach, the selection and implementation teams know how to orient their thinking and decision making so that the strategic lifelines of the business are improved. If they are not, correction actions can be well defined.

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