How to calculate ROI in an ERP project

How to calculate ROI in an ERP project

The ROI on an ERP project is the amount of money you get from implementing the new or improved software. It also indicates the economic impact of the implementation process, translating the amount of money that must be spent to obtain the improvement. It is ultimately a cost / benefit ratio.

It is, therefore, a measurement instrument for decision-makers with decision-making capacity in the investment of software, and it should allow the design of strategies that provide the maximum benefits, generally expressible in terms of productivity and quality.

It is wrong to suppose that there will be improvements in processes due to the simple change of software platform; the investment must be economically dimensioned. Consequently, the ROI in software has to answer the following basic questions:

  1. What does the implementation of management software contribute to your company in economic terms?
  2. What is the economic impact of changing your processes for software implementation?

Why is it important to analyze ROI in an ERP project?

It is important because it tries to quantify the amount of money you can get from adjusting a new process. You can even use it to determine how much money you lose by “undergoing” the new process as a result of implementing the new software.

The analysis of the ROI is necessary because its value can be surprisingly large, negligible or negative, and consequently will help guide what the best software solution in which to invest. At the very least, the return on investment adds a sobering piece of information to the relentless enthusiasm aroused in some “managers” for investing in new software, especially if it initially brings a negative ROI.

The implementation of new software can have an acceptable negative ROI, and this, of course, does not mean that the investment is not effective. It simply requires that in the long term it must be reliably monetized. Therefore, a realistic quantification of the return on investment will help to overcome an initial negative impact, negligible on the overall or long-term economic performance.

How to promote an investment in an ERP through ROI?

It should be a simple relationship: all the benefits with respect to all the costs of the implanting process. The benefits generated as a result of the implementation of the new ERP system can be expressed in several ways:

  • The increase in the variety of products or services offered.
  • Size of the client portfolio.
  • Effective control of the treasury.
  • Improved customer satisfaction.
  • Information reliability.
  • Decrease in costs.
  • Decrease in cycle times.
  • Decrease in the complexity of the process.

All the mentioned are good examples of generated benefits. The costs that the implementation of an ERP must assume include at least:

  • An analysis of your strategic planning.
  • Efforts in educating users about the new software.
  • An effective change management.
  • Process redesign.

Finally, it must be taken into account not to ignore unforeseen events, the result of functional extensions not contemplated in the initial scope, as well as their subsequent maintenance; It is advisable to make a provision of approximately 2% of the initial cost (at least).

There are also other no less important additional costs of an ERP , among which are included days of analysis of external consultants, travel, productivity losses due to the support of the implanter team, and considerable days dedicated to the realization of prototypes and simulations in the new ERP.

The effort to quantify and measure “indirect” costs associated with the salary of the internal project team is very important, as well as the socio-political resistance of facing the new ERP Software that you will always find, since some key users may understand that this process it is dangerous for their interests or professional career, or also as a deterioration of their share of power and status.

Lastly, it must be taken into account not to ignore unforeseen events, the result of functional extensions not contemplated in the initial scope, as well as their subsequent maintenance; It is advisable to make a provision of approximately 2% of the initial cost (at least).

What are the keys to providing an ROI in a suitable project?

Providing an ROI in a suitable ERP project includes a brief analysis of the different ERPs that can be implemented, conducting surveys and calculating the potential benefit expected from the investment. These calculations do not require a graduate degree or Nobel Prize in economics, nor do they require a 15-year projection. Return on investment formulas contain only two fundamental expressions: benefits and costs.

Costs are the easiest to quantify, so you should focus on the expected benefits. The more you can identify the benefits, the closer you are to delivering a reliable ROI.

Where to get potential benefits from?

From conducting surveys within your organization, only then is the benefit perceived, of course, based on the different possible cost scenarios. In other words, the potential or expected profit can only be obtained by:

  1. The maximization of profits by providing your company with alternative ways of conducting business.
  2. The minimization of costs resulting from the improvement in productivity.

The difficulties you will encounter in evaluating ROI in an ERP project are numerous, since it is more than just applying a simple equation.

What ensures the expected ROI once the ERP is chosen?

The return on investment in an ERP project ensures the choice of a good provider that provides experience and a significant number of qualified professionals, facilitate the expected return, although it is the company itself that must ensure the success of the implementation.

It is the programmers, software engineers, business consultants, who often bear most of the responsibility and workload in the field of technology, but that is initially. It should be the implementer who supervises and leads the implementation process as a whole, managing the internal resources necessary to support the entire process from pre-sale to the final maintenance phase.

The mistake is often made of giving the supplier 100% responsibility for the quality, productivity and reliability of the ERP once implemented, and there is no excuse to ignore or stop auditing the return on investment expected in each process, nor does it to stop directly or indirectly intervening in any phase of the implanting process.

As long as there is the ability to manage better in an adequate distribution of tasks and responsibilities, the success of the investment in software will be guaranteed .

Leave a Reply