When your company makes a major investment, you would do well to calculate the return on investment. This will help you make the right decision. But how do you do that with ERP software? Is it possible to calculate ROI at all?
The cost
It starts with calculating the cost of the ERP software. In the process, components are quickly overlooked. In any case, include the following in your calculation:
- Software: user licenses, modules, customization, links to other systems, reporting & BI tools, interfaces, maintenance and upgrade
- Hardware: infrastructure, servers, computers, mobile devices, connections
- Services: implementation, conversion, consulting, training, support, project management, optimization
Assume total cost of ownership in your calculation. Include all direct and indirect costs of acquiring and using the software over a predefined period of time.
Revenues
Much harder to calculate, but of course at least as important, are the (expected) returns on the investment in ERP software. First, there are a number of direct, measurable benefits, which will vary by industry and organization. Some examples:
- Lower inventory costs
- Lower administration costs
- Higher sales
- Reduction in number of employees
- Increase number of quotations converted into orders
A number of indirect benefits can also be named that result in indirect revenues. Consider, for example:
- More satisfied employees
- More satisfied customers
- Working more efficiently; fewer errors, less duplication, less time-consuming
- Be able to make better and faster decisions
The ROI
As accurately as possible, map out all costs associated with the investment in ERP software and set them against the expected returns. For revenues, consider indirect benefits of the ERP system and try to quantify them as best you can. For direct benefits, you can define a number of KPIs, e.g., increase sales by 10% or decrease inventory costs by 20%. Do not stare blindly at costs, but focus on ROI. Only then can you determine whether investing in ERP is a good move or not.
Remko Gaastra is President of Dysel USA and responsible for Marketing. He discusses daily the challenges and risks that (potential) customers experience with software.
