How to calculate the ROI of an ERP project
ROI is a vital part of overall project evaluation, and can help you make better-informed decisions when it comes to future implementations.
Once you’ve planned, implemented and are up and running with a new ERP system, it’s reasonable to say that the hardest work is over.
Nevertheless, as with any major IT project, it is important to spend some time calculating the return on investment (ROI) of your project, as this is a vital part of overall project evaluation, and can help you make better-informed decisions when it comes to future implementations.
And of course, if you can accurately calculate the ROI before you implement an ERP system, then you can make better decisions between two or more ERP options.
The question is, how to do it?
On the face of it, calculating the ROI of any project is relatively simple. You need to know two figures – the expected costs of the project, and the expected returns of the project. Subtract the costs from the returns, and divide the result by the costs. You end up with a quotient which, expressed as a percentage, is your ROI – and clearly, the bigger the ROI, the better.
The problem is that costs and returns can be defined different by different businesses and different departments within those businesses. Here are some areas you should make sure you are paying attention to.
The costs of an ERP project go far beyond the third-party costs involved in actually purchasing the system. First, think carefully about the platform itself. Do you need to pay extra for additional modules or customisations? Think, too, about the costs of user licenses, and SaaS subscriptions if that is the model you have chosen.
Then, think about the implementation process. Most businesses deploying a new ERP system will work with consultants to configure and install the system, to run tests, to migrate their data and to affirm that everything has been done correctly. Have you factored in all of these costs? And what happens if the deployment does not run smoothly? Will extra costs start to creep up if additional time is required, for example? How will your staff be trained on using the new system, and what happens if they need additional training after that first period is over?
From there, consider the ongoing maintenance and monitoring of your system. Will you need to extend an existing managed services contract to look after the new platform? How will you manage upgrades and security patching?
Finally, you need to think about the expected lifespan of your new ERP system. What do you plan to do once that lifespan is over? What scalability and flexibility is built into the system, and what happens if your business grows faster than expected?
Part of what can make ERP systems so impactful is the sheer breadth and depth of business benefits they can enable. Proper calculation of returns requires you to take a holistic view of these benefits. For example, do you expect the ERP system to enable you to make more products, or to speed up your production process? Do you expect it to free up human resource to focus on more complex tasks?
Even harder questions to answer can be predictions about the kind of benefits you will unlock with new business intelligence. Do you expect to be able to make smarter choices around vendors, product procurement and contract negotiation, for example? You may not be able to translate these issues to a precise returns figure, but you do need to be reasonable confident in the estimation process you are going through.
You should also think about the time taken to implement your ERP system, and the levels of risk that different ERP systems might carry. These, whilst not strictly financial figures in and of themselves, are likely to have an impact on costs and returns.
Calculating the ROI of an ERP system is essential for both project planning and evaluation. Taking a comprehensive view of costs and returns will help you undertake your calculation accurately.