How To Calculate The ROI of An ERP System
Return On Investment (ROI) of ERP Systems
The conventional method of calculating ROI of a software project is usually based on the idea that an organization will be able to realize tangible benefits from the new software from the time it has been installed. However, this particular concept does not easily apply to an ERP solution because here the ROI is usually delivered in line with the improvement of business processes. In most cases, this requires time to be measured. In this respect, it is to be noted that undertaking a ROI calculation prior to purchasing an ERP solution is not always recognized as an elusive dream. In fact, it is a crucial part of decision-making process.
So, how do you attain this? What you need to remember is that ERP system takes the key data from a range of sources within a business organization and transforms the raw data into actionable information.
With an ERP solution positioned strategically, you will be able to get a better view of the stock levels, daily sales, work in progress, accounts receivable, and a range KPIs. Additionally, you will also get to make informed decision, prepare essential reports automatically, have a faster access to detailed information, and track transactions. Calculating a ROI in this respect is all about establishing a value to the result that this new found efficiency and capacity will bring to your business.
Video – How to calculate 5 year ROI of an ERP Software
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ROI and ERP Implementation – Attaining a Successful Relation
To ensure successful ROI generation, you need to focus on proper ERP implementation. Usually, the caveats involve the following –
- ERP implementation must always be driven by appropriate tactical and strategic process improvement objectives involving Proper ROI metrics and expectations along with proper document assumptions.ERP implementation and the new processes must always be implemented properly and fast to meet ROI expectations at best and become measurable with a positive approach.
- These two objectives though seem certain are rarely implemented while deploying ERP solution for the very first time. Due to this, a number of problems arise while implementing the process and following the implementation. Such lack again largely necessitates a re-implementation objective or a tune-up. Undeniably, ROI involves process improvements and support of ERP. It is to be remembered that ERP software when taken up alone rarely makes any good to improving business processes or performance. Being a business, if you continuously look forward to following similar kind of pre-ERP business processes following the implementation, you should expect worse or just same kind of performance. ERP support certainly helps supporting a number of new processes, but the organization should be sure about the processes and their use.
- ROI that is Applicable to All Business.
Every business features a different model of functioning; however, there are certain aspects that stand common to all businesses. For instance; every business needs to undertake banking, pay staff, receive and process orders, send and receive invoices, and adhere to tax regulations. While processing ERP purchase, businesses need to start by mapping out the occurrence of these internal processes. From knowing how an order is processed through your system to identifying inefficiencies and bottlenecks, you need to know and understand it all.Calculating ROI means applying a figure to the value of correcting the lack or inefficiency that you have documented in your business. For instance, a manufacturer having a paper-based accounts department handling around 1800 transactions daily with around 20 staff for managing the process can easily bring down the number of employees to three and reduce the overhead expenses by around $1.3 million by turning to automated ERP solution.
- ROI across Different Sectors.
Certainly, all businesses have some common processes that helps in their functioning, the similarities between the companies usually starts stemming once you leave the accounts department. This is usually known by the name of specialization. If you are into wholesale, manufacturing, not for profit, professional services, and trade business, you will be delighted to know that there a number of areas in these businesses where ROI traditionally can be calculated.
Take a look at how ROI calculation of ERP systems affect different business sectors:
For businesses involved with the wholesale sector, the catch to generating maximum profit rests with inventory turnover. While maximum stock leads to complete ageing and warehouses inventory, too less stock can lead to lost customers and unfulfilled orders. Having appropriate inventory information at your fingertips allows the management to optimize buying cycles and stock levels. Did you ever wonder what 20 per cent reduction in stock level on an average along with 20 per cent increase in order fulfilment yearly will mean to your business? Business processes without ERP installation usually features a number of inefficiencies. Sometimes, even routine queries seem unanswerable.
Common questions related to stock availability becomes tough to answer without ERP implementation. However, with ERP support in place, the visibility regarding company processes or business functioning gets bigger and better. Checking stocks during anytime of the day gets simpler and easier with ERP implementation. Additional to this, getting a snapshot of the business performance based on key performance indicators and estimating the sales period becomes easier. ERP installation not only allows businesses to efficiently run, manage and operate business, but also provide a support that helps forecasting business processes and planning forward moves.
ERP implementation offers a certain kind of transparency to businesses processes that largely helps manufacturers in many aspects. From improving processes, controlling inventory, estimating cost of goods, purchasing, to scheduling production, the benefits are certainly many. Appropriate implementation also paves the road to better use of fixed assets, which further helps reducing variable production costs largely. The real-time information offered by the dashboard of the ERP system largely fastens the company’s marketing time and also helps taking actionable performance. Additionally, it also offers an opportunity to fix problems immediately than waiting till the end. ERP implementation also makes decision-making process easy.
If you are a solicitor or an architect, you can always look forward to effective ERP implementation and proper calculation of ROI. Accurate tracking of billing hours stand important to your business as it helps maintaining and increasing the profit ratio of a firm. The ROI calculation for these firms is directly connected to easy tracking of the billing time spent on emails and phone conversations. This is further related to proper allocation of time accurately and quickly for finishing a client project or job.
Usually, these particular tasks are best executed through ERP implementation paving the road to significant generation of ROI. For instance, IT firms having an ERP solution placed strategically in their business can look forward to delivering increased annual revenue against what they have been delivering without ERP implementation.
The lack of profit aim does not indicate that not-for-profit organizations can easily ignore the finance part. In fact, it’s the other way round; with resource availability being scarce, these organizations should focus more towards effective allocation of funds. While the kind of work that these organizations undertake, which ranges from automobile associations, health insurance to charities, seem to be varied, they can actually look forward to adopting a similar approach while allocating funds. Whether be it the salaries, operating expenses, or project funding, every aspect requires complex reporting.
The manual workload that is involved to produce these reports usually tend to be very high, which further takes a good amount of resources, time, and effort. The ROI generation of ERP for these organizations usually focuses on delivering accurate reports that can be easily generated. This particular approach largely frees up some administrative time, which otherwise could have been allocated somewhere else. Implementation of ERP system offers extra transparency, helps write reports better, integrate easy and straightforward systems, and easily bring out information. ERP implementation wonderfully takes away the concern of struggling with Excel spread sheet formatting and has largely emerged as the new solution to better managing and tracking business flow.
Businesses that involve plumbers, electricians, and technicians, the ROI from an ERP implementation is generated through improved project and job costing, appropriate allocation of materials and labor, and effective scheduling and resource planning. ERP implementation without any doubt paves the road to better stock control and appropriate job costing along with better time sheet facilities. Being aware of the margin in these types of job is very much essential to ensure better flow of business processes. ERP implementation helps projecting a better picture on business performance based on KPIs.
Return on Investment of ERP System – The Final Thoughts
The decision to implementing or deploying ERP solution must always be driven by essential objectives directed towards improving business processes. While some improvement objectives stand common to all business sectors, some others tend to be exclusive for a specific industry or particular organization. The key to performing a valuable ROI analysis rests with determining your estimated ROI against particular process improvements that you determined in your internal audit. Once you have successfully defined the metrics for determining improvements with respect to your organization, the value of these particular objectives can be easily estimated without any concern.