When your company plans to make a large investment it is wise to calculate the return on investment. This will help you to take the right decision. But how should you do that with ERP software? Is it even possible to calculate the ROI?
It starts with calculating the costs of the ERP software. In this process, some components are quickly overlooked. In all cases, include the following in your calculation:
- Software: user licenses, modules, customizations, connections with other systems, reporting & BI tools, interfaces, maintenance and upgrade
- Hardware: infrastructure, servers, computers, mobile devices, connections
- Services: implementation, conversion, consultancy, training, support, project management, optimization
In your calculation you should focus on the Total Cost of Ownership. Take all direct and indirect costs into account of the purchase and use of the software during a predefined period of time.
Much more difficult to calculate, but of course at least as important are the (expected) revenues from the investment in ERP software. First, there are a number of direct, measurable benefits, which will differ per industry and per organization. Some examples:
- Reduced inventory costs
- Lower administrative costs
- Increased sales revenues
- Reduction in number of employees
- Increasing number of quotations converted into orders
A number of indirect benefits that lead to indirect revenues can also be formulated. Think for instance about:
- More satisfied employees
- More satisfied customers
- Work more efficiently; less mistakes, less duplicate work, less time-consuming work
- Make decisions better informed and faster
Map as accurately as you can all costs associated with the investment in ERP software and set it off against the expected revenues. With the revenues; also take into account the indirect benefits of the ERP system and try to quantify them as much as possible. For the direct benefits you can define some KPIs, for example an increase in sales revenues of 10% or a reduction in inventory costs of 20%. Do not focus on costs, but focus on ROI. Only then you can determine whether the investment in ERP is a good decision or not.
Remko Gaastra is President of Dysel USA and responsible for Marketing. He discusses on a day-to-day basis the risks and challenges (potential) customers experience with software.