What to consider when calculating the ROI of your ERP implementation
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Are you considering an ERP implementation? Before proceeding, you probably want to know what your business is going to get out of it – after all, an ERP implementation, while important, is not inexpensive. You’ll want to fully understand how it will benefit your organization. But, how do you determine the return on investment, or ROI, of ERP implementation projects?
What does a return on investment look like for an ERP project?
While there are many factors to consider when understanding what your ROI will be, a simple definition is this: it’s the amount of monetary gain your company will realize divided by the amount spent, or the total cost of ownership.
Calculate your total cost of ownership
There are a number of costs to include when calculating your total cost of ownership, such as:
- License fees
- Implementation costs
- Consulting fees
- Hardware costs, if applicable
Additionally, you’ll want to include the cost of maintaining your software. Maintenance can include support and IT personnel.
Other factors to consider
There are other factors to consider outside of the total cost of ownership, when it comes to the ROI of an ERP implementation.
- Inventory planning: Whether you have too much inventory on hand or too little, an ERP solution will help determine the optimal amount to maintain in order to avoid stockouts but minimize your warehouse overhead. This will save you money in the long run.
- Operation costs: Automating or making business processes more efficient with an ERP solution minimizes shortages and interruptions, reduces material and labor costs, lowers administrative costs and more. This will ultimately improve your bottom line.
- Improved production: ERP software can help lower costs through streamlined processes, reducing redundancy through data visibility and improving data consistency with better access across departments within the organization.
Also, don’t write this off: two additional factors to consider are your payback period and the intangible benefits you receive from running your business using ERP software. The payback period is the period of time it takes to recoup the cost of your implementation. While you will begin to see the return on your ERP investment quickly, many forget that these will not appear as a profit until the payback period is over.
The payback period that affects your ROI is a hard number – but intangible benefits are not. What are intangible benefits, and how do they affect the ROI of your ERP implementation?
Intangible benefits of an ERP implementation
When calculating the ROI of an ERP implementation project, there are tangible benefits and intangible benefits. Tangible benefits are the ones easily determined and calculated. Intangible benefits are the gains that are difficult to measure. Both affect your ROI in some way. Examples of intangible benefits include:
- Added efficiency and automation of business processes
- Error reduction
- Improved customer service
- Faster, accurate accounting practices
- Better information and reporting
Determining tangible benefits
Tangible benefits are easily measured. You can see they exist and are quantifiable. Some tangible benefits to your organization as a result of an ERP implementation are:
- Optimized level of inventory
- Reduced purchasing costs due to ability to negotiate with vendors
- Minimizing days outstanding in accounts receivable
Many intangible benefits are the secondary effects of tangible benefits. Real-time data visibility can result in faster and more accurate accounting practices because your finance department can access and leverage business data quickly. An optimized level of inventory can have a positive effect on customer service due to improved delivery time and lower shipping costs.
What else should you consider?
Benefits, both tangible and intangible, and their effect on your ROI aren’t the only factors to take into account. Planning for change management is crucial to the success of your ERP implementation project, and as a result, your ROI. When planning an ERP project, ensure that everyone, from the C-suite down to the end user, has a voice. An ERP project is involved and takes time, requiring the effort and cooperation of everyone.
Knowing the biggest areas of opportunity for an ERP implementation will also affect your ROI. Choosing an ERP solution optimized for your industry or areas that need the most improvement will have the greatest impact on your business, therefore improving your ROI. Taking stock of your requirements will lead to an informed ERP selection, and therefore getting the best ROI possible.