Whenever businesses make hefty investments into improving their operations, they do so on the premise that they will get something in return. While some investments, such as those in brand reputation, may produce immeasurable results, most business owners want to know how to calculate the return on investment (ROI) before committing to expensive upgrades.
While companies acknowledge that implementing enterprise resource planning solutions is necessary to keep their companies up-to-date, they’re still unclear about how to calculate and maximize their ROI with these systems.
When ERP systems are customized to suit your industry, they often serve as the foundation for superiorly optimized operations. But the process of getting there always entails an adequate investment in time, effort, and money before business owners realize the true potential of the platforms.
With that said, calculating a dollar-for-dollar amount quantifying a palatable return on investment for enterprise resource planning is no easy task. Several variables are at play, and factoring ROI requires granular data from your past and present operations.
While there is no precise formula for determining the ROI of an ERP solution, widely adopted guidelines exist. These formulae can be used by most organizations to help with their assessments. In this article, we’ll cover the general process of calculating ROI for an ERP implementation before suggesting a few best practices to help optimize your system.
How to calculate the ROI on ERP solutions
The steps to determine the ROI of an ERP implementation are fairly straightforward. However, each phase requires ample research and deliberation to ensure an accurate assessment.
Step One: Start by quantifying costs
When you calculate the financial return on your ERP, start by highlighting all the expenses you’ve incurred thus far along with any recurrent costs that result from your staff using the system regularly. As you perform this analysis, consider the following:
Licensing and subscription costs – For in-house initiatives, software licensing fees are typically paid upfront. Alternately, companies that go with software as service (SaaS) subscriptions are billed monthly.
Implementation costs – These expenditures should include any upfront fees paid to the provider to put the system in place and as well as any outside consultancy expenses you’ve incurred to learn how the system works.
Hardware and infrastructure maintenance costs – If you’re installing your ERP solution onsite, the upfront investment in hardware and infrastructure can be substantial. Most companies must absorb regular annual payments for maintenance and other fees on top of additional out-of-pocket expenses. This is less of a consideration for companies that have opted for Cloud-based ERP solutions.
Training expenses – Most ERP vendors include training as part of their normal installation and implementation services, but additional fees apply for advanced and ongoing instruction.
Upgrades – Your ERP software requires regular updates to function optimally. And while routine upgrades and patching are necessary, they’re not free.
Support costs – Your provider will likely offer staggering levels of support. Premium client support packages are billed either monthly or annually.
Customized solutions – Customized configurations are costly and should be avoided if possible. Preserving your system with routine updates and upgrades may prove difficult as well. If you have a generic ERP, there are times when customizing can’t be avoided, however. Always consider these costs as you calculate your ROI.
Labor expenditures – Labor costs that result from your internal staff assuming new responsibilities during the implementation phase and thereafter must be taken into account, as well. Moreover, if your team lacks the appropriate experience with ERP solutions, you may incur additional costs from an outsourced consultancy.
Step Two: Evaluate the benefits
Before you can arrive at a reliable estimate of your ROI, you need to understand the benefits unlocked by ERP. Savings and additional revenue should be your foremost considerations, and you’ll need access to the metrics from your prior system for comparison.
You can either evaluate these results while your old system is still in place or examine historical data next to your present-day results with the new system to identify the differences in productivity and revenue.
Here are the core metrics for performing this analysis:
- Time and labor costs
- Waste and scrap production
- Warehouse efficiency
- General operational overhead
- Analytics and data management
- Safety and legal compliance
This is where the assessment gets difficult because many companies simply lack the hard data to reliably complete the evaluation. The best approach is to consult your ledgers and classify the figures for the easiest comparative analysis.
Step Three: Insert your variables and complete the formula
Once you feel confident your monetary sums for expenses against the value delivered by your new system are reasonably accurate, you can use the following formula to give you a rough estimate of your ROI:
ROI – [(Value of Investment – Cost of Investment) / Cost of Investment] x 100%
The resultant accuracy of your calculation depends upon how complete the information you gathered to satisfy the equation is. Even if you feel like you have good data, the likely hood of this figure reflecting an exact percentage is low. The more robust your ERP reporting, data analytics, and business intelligence features are, the more realistic this will be.
Optimizing your ROI with best practices
Maximizing your return after any ERP implementation means you’ll have to minimize your costs, as you strive to get the most out of the solution. The best approach is to remain diligent during the research and request for proposal stages by confirming that all platforms are optimized for your industry.
Some providers may offer one-size-fits-all solutions for a given enterprise, but the truth is that no two businesses are alike, and such platforms are usually insufficient. Irrespective of your industry, your ERP solution must be specifically tailored to handle the unique obstacles that characterize and inform your regular operations.
Choosing a trusted vendor
WiSys helps companies regain control of their facilities with warehouse management made easy for SAP Business One and Macola. To learn more about optimizing your ROI after an ERP implementation, contact our team by dialing 770-955-3550 today.