When properly managed and implemented, ERP can be a significant driver of return on investment (ROI). As a CFO, you know that it is imperative to be able to calculate the net return of your ERP investment. In order to do that accurately, it’s important to have a handle on both the costs and the benefits associated with the project. This article will help you understand how to define and measure ROI of an ERP system.
Defining ROI of ERP
The cost of the ERP system and its implementation are fairly straightforward and include items such as software, hardware, implementation services, consulting, training and support. When a company pursues ERP, the goal should not necessarily be to cut technology costs, although this can happen, especially in a cloud-based solution. Given the added investment the project requires, the solution is often pursued for broader business reasons, such as increasing efficiency and streamlining processes. These benefits can be trickier to measure and require attaching dollar figures to items such as:
- Improved production efficiencies through inventory and lead time reduction
- Increased sales revenue through better managed customer relationships
- Reduced materials cost through improved procurement and payment systems
- Reduced labor cost through better staff allocation
- Reduced administrative costs through automation and integration of previously manual or disconnected processes
Establishing the right metrics from the start will enable you to translate your real ROI and is something your implementation partner should help you with.
Ways to measure ROI of ERP
One ROI measure is to calculate the payback period. This is the length of time needed for the return (benefit) to equal the investment (cost). A longer time period means a less compelling business case. A shorter length of time reduces the risk of moving forward. Obviously, larger investments often mean longer payback times. Although this is a useful metric, it is not the only way ROI should be measured on an ERP project.
A more complex way to measure ROI involves comparing the annual rates of return of various options. You can compare different ERP solutions as well as compare a new solution to the cost of doing nothing. This is typically what we think of when we measure ROI and provides a useful tool for choosing the right solution.
The Intangible Benefits of ERP
It is our experience that many organizations do not adequately address ROI when making ERP decisions. As a CFO, you can appreciate that it is often difficult to measure all outcomes. Some “intangibles” offer significant benefits to the organization, even without a specific price tag and can include:
- Accurate and quicker access to data for decision making
- Improved customer response and satisfaction
- Consistent and compliant global reporting
- Enhanced organizational transparency
Summary
No organization has limitless resources, and companies expect major expenditures like an ERP system to produce a rapid ROI. Smart companies recognize that identifying benefits is a prerequisite for assessing the investment payoff. At Western Computer, we can assist with a cost / benefit analysis to help with this type of decision making. We can also share the ROI results our customers have obtained when implementing ERP systems. Contact us today for a customized CFO presentation and demo.
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