Return on Investment for ERP – How Do You Measure It?

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A question that we often hear is: “How do you begin to estimate the anticipated ROI of an ERP system? What would be a reasonable methodology?”  To answer this question, I would look at five main factors to estimate the ROI of an ERP system:  1) IT costs, 2) productivity, 3) visibility, 4) risk, and, 5) audit and compliance impacts.

Below I've outlined the key things to consider in each of these areas:

  • IT Costs:  Hardware, replacement, personnel, ongoing training, related services, software and subscription costs all factor into your IT costs.  These are the simplest factors to calculate.
  • Desired Productivity Impacts: It is important to estimate the impact of helpful system support or efficient integration, if there are specific areas you are looking to improve.  The impact of data errors due to an un-integrated system can be costly, waste time, and is a very common ROI component to consider.
  • Visibility Impacts: New ERP systems generally provide better access to more reliable data, which improves financial control.  Better control means significantly better financial visibility. In addition, improved visibility moves data through your organization in a more efficient way.  It quickly gets information to the right people – which is a measurable value.
  • Audit and Compliance Impacts: Improved controls and repeatable processes increase your ROI by lowering audit and oversight costs.  Regardless of the industry requirements you have, whether it be GAAP or ISO, compliance requirements are better followed with a new system.  ROI increases with lower oversight and review costs, and demonstrating quality controls will make positive impressions on your customers.
  • Risk Impact:  The cost of risk is often the hardest to estimate.  You’ll want to carefully consider the level of risk built into your current system.  Risks arise when relying on people-based processes which hinge on specific individuals or skill sets for some company functions.  There’s also the risk of revenue leakage or unhappy customers, as poor administration execution can lower customer satisfaction.  Finally, never underestimate the risk of an older system crashing, especially when running an unsupported version.

ERP system implementation can impact your business very broadly, and sometimes in unexpected ways.  Not all of these impacts are easily measurable, but an ROI analysis is a helpful starting point.   Of course, the situation matters, and you will need to apply your best judgment based on the circumstances.

At Tensoft, we recognize that selecting an ERP system is a substantial investment in terms of time and money.   Estimating the ROI before selecting and purchasing an ERP system can help lower overall costs.  With many options, selecting an ERP system can be overwhelming and complex. However, you now have some tips to better understand ROI methodology to help you pick the best ERP system for your company.  For more help with your selection process, please contact me.

By Bob Scarborough, Tensoft, a Silicon Valley-based Microsoft Dynamics Partner

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