How much does ERP cost and how soon will I see a return on my ERP? We hear this set of questions often while working with customers in different industries at various stages of their digital transformation journey. But our experience tells us how many customers have a difficult time answering these questions.
While increased profitability, reduced operating costs, and reduced inventory levels are measurable, some ROI indicators can be more challenging to quantify. These broadly specific questions seeking definitive answers are understandable for anyone undergoing a software evaluation for their business. When your company buys a new vehicle or invests in a piece of equipment, it’s easy to calculate the ROI. Perhaps the better question to kick things off is: How do I figure out the ROI of my ERP?
Your ROI analysis should begin before beginning any ERP project. Done right, the insight you’ll receive enables you to build a business case for your ERP project while establishing a data foundation that can be used to track the system’s expected performance in the future.
Of the many metrics you can use to measure your ERP return on investment, these are usually broken into tangible versus intangible benefits. And while it’s easy to calculate the cost of an ERP implementation, it’s often difficult to determine the full ROI. Many of the wins you get from ERP aren’t quantifiable or easily tracked, especially if you’re not sure what you’re looking for.
If the basis for investing in an adaptable ERP platform is to bring down operating costs and boost productivity, it works out nicely that the savings and ROI from a new ERP system helps compensate for the price tag. In return for improved production, planning and procurement practices, better allocation of resources, ERP delivers a reduction in inventory, overall waste, and even labor costs. These are examples of your tangible, more easily measurable returns.
Among the intangible, hard to measure benefits, you have improved customer service, compliance and data integration coupled with streamlined procedures that result in improved accuracy, efficiency, and visibility.
Let’s take a closer look at the top 3 metrics to help you get ERP ROI sooner.
Reducing IT infrastructure
When determining the ROI of your ERP, moving to the cloud is perhaps the most impactful on reducing IT costs. A cloud ERP deployment is simpler, faster, and more cost-effective since little or no on-site IT infrastructure is required. Consider the cost reduction in software licensing, as well as the savings on hardware investment and ongoing support since cloud-based ERP systems require no on-site maintenance.
Reducing the cost of labor, improving productivity
Labor costs are among the most significant budget line items for most companies, so keeping those expenditures under control is key to realizing the fullest extent of your ERP ROI.
The increased productivity of your staff through automation is one of the most impactful measures that save money and time. ERP allows you to identify where your staff’s time is most productive as well as uncover areas of excess waste. Tracking labor efficiencies can be difficult and time-consuming, so if you are reliant on manual processes like spreadsheets to manage labor costs, chances are it’s holding you back.
Moving from a manual, paper-based system to ERP for managing labor costs eliminates errors and lost documents. However, it’s important to note that while an ERP implementation optimizes labor costs through better planning and scheduling, headcount reduction is not usually the goal. Often unskilled labor redundancies get offset by more impactful, skilled staff.
Did you know… 90% of consumers would take their business elsewhere if they learned a company ran on outdated technology?
The third key metric is improved visibility, and while challenging to measure, is more impactful than it gets credit for. Using a modern ERP delivers real-time data from across your organization, from accounting to the warehouse, giving you more visibility into processes and how employees use their time as well as the bottlenecks preventing your employees from efficiently doing their jobs. The return on full visibility comes through making better, quicker, and more informed business decisions. With data and reporting capabilities right at your fingertips from an intuitive dashboard, staff and key decision-makers can make those impactful decisions.
The ERP ROI Calculation
With no standard for measuring ERP ROI in place, several essential measurable benefits allow you to perform a structured analysis method. These include the purchase price, implementation costs, operating costs, upfront costs (e.g. software license fees, hardware expenses, software configuration, IT workforce, total system installation), user training, and maintenance over five years. To take it a step further, estimate your expected benefits over a specified period of time, including reduced inventory, operating and labor costs, as well as improved production.
In Part 1, we discussed the importance of developing an implementation strategy for ensuring a successful ERP implementation for your business. In part 2, we focus on the most common ways ERP implementations fail so yours doesn’t have to. ERP implementations are a process. By the time you’ve identified which system will bring the most
ERP implementations are a challenging task… or a challenging set of tasks, that is. Ask the many who’ve successfully undergone the digital transformation to modern technology like enterprise resource planning (ERP), and they’ll tell you the same. Despite ERP’s widespread adoption, each implementation presents new challenges since each distinct organization brings its own requirements, expectations,