If you’re thinking about implementing an enterprise resource planning (ERP) software solution, it’s good to make an informed decision about the product. Sure, a new enterprise-wide financial management system might have flashy features, but recklessly rushing a purchase decision won’t do you and your company any favors.
Before embarking on an ERP project, figure out how much it’s going to cost and weigh it against the benefits. By calculating the return on investment (ROI), you are in a better position to make a decision and evaluate the worth of an ERP system. Unlike most ROI calculations, however, a cost-benefit analysis of ERP is slightly more nuanced.
Like most business decisions, choosing whether to invest in a particular ERP software initially comes down to price. So how much does an ERP system actually cost?
The answer -- and we apologize in advance for being vague -- is it depends. A mistake many companies make is paying attention only to software license fees and ignoring the other, hidden costs of an ERP implementation. The truth is, there are actually numerous factors that influence the total price of your investment. This includes the deployment method, service costs, number of users, and the implementation process itself.
An on-premise deployment usually starts with a larger upfront cost as you have to purchase and manage the hardware, servers, and networking resources yourself, while cloud-based ERPs are managed by a third-party and therefore have lower initial cost.
Assuming your chosen ERP solution is a cloud-based software, you’ll have to pay a per-user-per-month subscription model. This means the bigger the business, the larger the bill at the end of the month. In addition to the initial setup costs, you’ll have to factor maintenance fees and software customization into the equation.
As your staff could take a few months to a year to fully learn the new ERP system, employee onboarding should also be included as a cost in the project. Do keep in mind, however, that this won’t remain a cost for long. Usually after the first 6-12 months, employees would have likely adapted to the new software.
Once you’ve estimated the cost of your chosen ERP software and compared it against your budget, you then estimate the positive impact over a given period of time -- usually after a year or two. This part of the ROI calculation can become a bit complicated because there are several tangible and intangible benefits of an ERP system. Nevertheless, it’s a good idea to put together a detailed list of measurable and identifiable benefits of an ERP implementation project.
To begin with, some of the measurable benefits of ERP are:
- Decreased inventory management cost: improved planning and scheduling processes let companies buy only what is required, thereby reducing inventory costs. On top of that, they save companies approximately 15-20% of their current warehouse rent, utilities, maintenance, as well as theft and damage insurance.
- Minimized material cost: ERP procurement features allow organizations to better negotiate lower prices for goods and services. To find out how much you’re saving, take the cost of procuring goods for a year under the new ERP system and subtract it from the traditional system.
- Reduced labor cost: automated features eliminate manual processes, allowing you to better allocate worker time and reduce overtime costs. You can measure reduced labor by estimating the number of hours your personnel have saved in a year and multiplying it by their hourly wage.
Although estimating the intangible benefits of an ERP software is less intuitive, an ROI analysis is incomplete without the factors mentioned below:
- Improved customer service: delivering the right goods to the right customer is a key business strategy for many companies today. While it’s difficult to include qualitative customer surveys in your ROI calculation, you can measure the level of customer service based on the average percentage of on-time deliveries and the order fulfillment time.
- Legal and regulatory compliance: better process controls and document management reduce audit and oversight costs, thereby increasing your ROI. Here, measure savings by looking at how much you’ll lose if you fail to comply to industry requirements like ISO, GAAP, PCI, or SOX initiatives.
After you’ve placed a monetary value for each benefit and cost, you can now roughly calculate the ROI. Your equation should look something like this:
And that’s it! If the calculation yields a high ROI, then you have a strong case for implementing an ERP system.
Unfortunately, when it comes to unquantifiable benefits, calculating ROI can be a bit complicated. But does it make it any less useful? No. Estimating the ROI can help you determine whether an ERP system can work for your business, accelerate its growth, and prevent you from making a business-decision you might regret in the future.
At WhiteOwl, we understand all this can be nerve-wracking. Where do I start? How do I quantify the benefits? What is the positive ROI of ERP that I should be looking for? These are questions people often ask when they’re unsure about choosing an ERP system. Fortunately, we’re a team of ERP experts. As a partner of Sage Intacct and Dynamics GP, we have assisted several companies find the perfect ERP match for their business. Start the search for the right business solution -- contact us today.