Measuring ROI on an ERP Project
By: Johnny Nugent
An ERP project requires a significant investment of both time and money. Companies wouldn’t invest in them if they didn’t expect to see a major benefit to their bottom line as a result. How do you measure your investment after go-live and 1, 5, 10, 15 years down the line?
For this, we look at a metric called return on investment (ROI). Investopedia defines ROI as ‘a performance measure used to evaluate the efficiency or profitability of an investment or compare the efficiency of a number of different investments.’ To calculate this metric, the return of an investment is divided by the cost of the investment, and the result is expressed as a percentage or ratio.
First, we need to look at what it costs to implement a new ERP system. Here’s a list of the costs you can expect to incur during an ERP project:
- Licensing Fees. This will vary depending on how many users and whether you are hosting the software on-premise (one-time fee) or in the cloud (monthly fee).
- Hardware & IT Costs. If you are hosting the software on your own servers (aka on-premise) there will be a cost associated with purchasing the servers and keeping them up.
- Implementation Consulting Fees. The implementation consulting fees to get your organization to go live will likely be discussed upfront in the sales process. This number might vary based on the following factors: on-premise v. virtual, the size of the organization, the level of customization needed, the strength of business processes already in place, and your company’s overall ERP goals to name a few.
- Training. Perhaps not easily quantifiable, there is a cost associated with training your employees on the new system as it will likely take some of their attention away from typical responsibilities.
- Maintenance. This is a fee charged every year for on-premise users to continue to have access to the support team and new versions of the software. For cloud users, this fee is included in the monthly fee.
- Customizations, Add-Ons, Upgrades. These costs will vary greatly from company to company. Some companies require lots of customizations, while others just need the standard product. Similarly, some organizations will choose to add on other pieces of software such as BI, mobile solutions, and advanced planning and scheduling. Lastly, some companies may choose to perform upgrades with their own IT staff, while others may request ERP technicians to perform the upgrade. If you are a cloud user the ERP company will keep you on the latest version of the system without an additional cost - another benefit to the cloud!
While there are many costs associated with a new ERP system, there is also tremendous value. Here’s where to look for value gained after an ERP implementation.
- Increased Efficiency. A modern ERP system streamlines all your business processes, automating many manual processes and eliminating outside spreadsheets resulting in fewer human errors. The real-time access to data whether you are on the shop floor or the top floor means business informed decisions can be made faster.
- Streamlined Supply Chain. Track the prices of items in your supply chain with ERP. An ERP system will help you find the lowest prices and order the optimum quantity.
- Improved Inventory Management. Never overstock again. Keep track of inventory expiration dates so you don’t let inventory go to waste.
There are also benefits to using an ERP system that cannot be easily quantified. Two of these benefits are providing a higher level of customer service and making employees happier.
- Higher Level of Customer Service. A modern, easy-to-use ERP system allows companies to provide better customer service and to keep customers more satisfied. An ERP solution allows you to keep track of customer information from the beginning of the sales cycle and refer to and add to as the customer relationship continues. Customers will appreciate your team always being up to speed on information pertaining to them. ERP systems may also give customers access to tracking their orders online, eliminating the need to call in and check an order’s status.
- Happier Employees. Investing in a new ERP system shows your employees you care. While initially there may be hesitancy to adopt a new system, and it will take time to train employees on the system, after employees understand the system, they will see its many benefits. From increasing productivity to offering better company communication to retaining better talent, your employees will appreciate your investment.
While the costs of an ERP system may look high at first glance, there are many benefits that go beyond the list provided above. There are also ways to lessen your upfront investment. Think Visibility might be able to provide the ROI you’re looking for? Visibility has proven to provide ROI within the first year. Contact us here to find out more. Check some of our customer success stories to see the results yourself.