How to Determine the ROI of ERP Implementation Projects
ERP (Enterprise Resource Planning) systems are well-known for their contribution towards constructive business operations, planning, and functions. They make business processes convenient, smoother, manageable, and transparent. Investing in an ERP has a significant impact on the performance and growth of an organization.
Considering the benefits, it is wise to invest in an ERP system. However, it is also a reality that sometimes ERP systems do not turn out to be as advantageous for organizations as expected. The efficiency of an ERP system depends on various factors, like the organization’s budget, requirements, investment plans, etc.
The safest way to avoid pitfalls is to calculate the ROI of the ERP system you want for your business. ROI (Return On Investment) yields a percentage value that shows how much gain you can expect from investing in a particular ERP implementation project.
Let’s dive a little deeper to learn more about ERP ROI, how you can calculate it, and what you need to know when determining it.
What Is The ERP ROI?
ROI is a calculated value obtained from the formula to determine the overall efficiency of ERP software. This value will enable you to assess how the ERP will perform for your business. You can also track the strengths and improvement gaps across the organization’s departments with ROI.
Based on different characteristics, ROI can be further divided into a few categories, such as:
It refers to the gains achieved through the on-premise deployment of the ERP system. It will include the cost of software and hardware and the cost invested in maintenance and updates.
ROI calculated for outsourced ERP software is called cloud-based ROI. This ROI requires you to add up license or subscription fees and costs of hardware and devices required to use the software.
Hard ROI refers to quantifiable gains, such as output revenue, labor reduction cost savings, operational cost savings, and so forth. This ROI is represented as a numeric value, which gives you a clearer idea of the profit vs. loss ratio.
An organization’s success depends on soft gains, such as effective collaborative teamwork, improved customer service, increased brand awareness, enhanced policy compliance, etc. Such gains, known as soft ROI, cannot express numerically but have a crucial impact on the efficiency of ERP software.
- Total revenue would be the expected gains generated from ERP implementation.
- Total cost would be the total cost of ownership, including software purchase or subscription fees, hardware costs, maintenance, and labor costs.
Costs To Consider When Calculating ERP ROI
Calculating ERP ROI requires estimated costs and returns from the purchase or outsourcing of ERP to the end of a project. Determining cost values for various departments and processes seems to be a head-scratching task.
Below is a list of costs and returns that you must document as precisely as possible to calculate the ERP ROI.
Forecast the cost of infrastructure and network fees as per a specific time frame. Include the hardware and software costs, equipment costs, and costs spent on repairs, maintenance, updates, and replacements of that equipment and software.
If you intend to choose cloud-based ERP software, add yearly or monthly subscription or licensing fees to the total cost of investment. Include only a particular amount of fees you will pay for a period considered for ERP ROI.
Add the fees of consultants if the organization needs assistance during the implementation of a new ERP system.
Hardware and software maintenance includes updates, repairs, and replacements. Consider the expected and ongoing maintenance expenses for ERP software and hardware components and add them to the total cost of investment. Keep the life expectancy of the system in mind when calculating maintenance costs.
TCO also includes the pay and expenses of staff members and IT personnel involved in the ERP implementation project. Include the training costs required to provide ERP education and teach skills to the employees.
Forecast the return gains from the investment as accurately as possible and insert the total value in the formula. Consider certain factors that may affect the output or efficiency, such as training of employees, frequent software updates, etc.
Important Points To Keep In Mind When Calculating ERP ROI
Many things go into calculating the ROI of the ERP software accurately. Keep the following pointers in mind to calculate ROI without any confusion.
ROI Is Flexible
ERP ROI value indicates the net returns expected from ERP investment. However, the actual value may slightly deviate from the formula value due to several reasons, like inaccurately forecasted returns or costs, additional labor requirements, etc.
Also, the ROI value is exclusive of unexpected risks, like frequent hardware failures, the need for advanced equipment, disastrous events, etc. So, ROI indicates the estimated gains and not the exact gains.
Same ROIs Can Have Different Meanings
The value of ROI hugely depends on the payback duration of returns. Two projects with the same ROIs do not necessarily mean they are equally profitable. Instead, the time element will determine which one would be better.
A project requiring spread-out investment to show quick gains is better and safer than one requiring huge upfront investment and a longer payback. So, always compare the ROI with the time and payback criteria before concluding the final decision.
Collaborative Teamwork Is More Effective For Data And Cost Analysis
As you need to add up multiple costs and returns from various departments, it would be better to involve the workers of each department to provide estimated values. These employees will be able to make an accurate estimate due to their experience and expert analysis in their respective fields.
Determining ROI helps a lot when validating the decision of ERP implementation. The ROI value predicts whether or not the ERP system will be profitable for your business.
Calculating ROI is very simple, but collecting data for it is complicated and requires careful consideration of costs, returns, and factors.