How to measure the ROI of an ERP system
How to measure the ROI of an ERP system
Whether your company is large or small, making the choice to implement a new ERP system can be one of the biggest decisions you face as a business owner. ERP systems require a large investment of time, money, and manpower to implement.
To complicate matters, measuring the ROI for an ERP system can be tricky. There are tangible, and intangible benefits of ERP that make monetary gain difficult to measure. We’ll explain how an ERP system can help your business get to the front of the pack, and how to measure the ROI so you can invest with confidence.
How can an ERP system help my business?
ERP systems are designed to make your business run smoother and faster. Centralizing your data into one comprehensive solution provides a vast number of advantages for every branch of your business.
Streamlining into one ERP system can help…
Implementing an ERP system simplifies work across multiple departments, making employees more productive, accurate, and faster at getting the job done. A side effect of this enhanced productivity will be more money in your pocket.
How to calculate ROI for an ERP
Since ERP’s are a serious investment, it’s important to run the numbers to find out the ROI before the proposed system is funded. There are several formulas for calculating ROI, here’s one we find helpful:
ROI = TCO / Years + TCO x Profits Increase Forecast
How to do it
The first step is finding the Total Cost Ownership. TCO is a collection of all the costs associated with the ERP, such as…
- Hardware (if necessary)
- Licensing Fees (one time, annual, or per user)
- Consulting Costs
- Maintenance Fees
- Implementation Fees
More information on how to calculate the TCO can be found in this article.
Next, establish how long you want to use the ERP system. A standard payback period is (depending on your strategy) from 5 to 10 years.
Then it’s time to identify the Profits Increase Forecast. This takes a bit of work to accomplish. Proper analysis of sales reports, projections, and real-world estimations are important in gathering your numbers. It’s also important to factor in tangible and intangible returns the ERP system will yield.
Tangible Returns are measurable benefits that can be quantified. Things like reduction of unnecessary inventory, better personnel or equipment planning, reduced wastage, improved production. Things that will be immediately improved when the ERP goes live, things that you can attach a dollar amount to.
Intangible Returns are also important, but are complicated because they’re not easily calculated at the start. These benefits won’t be seen immediately, but will improve the bottom line with time. Examples of this are elevated levels of customer service, accounting improvements, error reduction, improved employee retention, establishment of clear operating procedures.
Once you’ve established your company’s increased earning potential, it’s time to plug everything into the formula.
This graph shows an example of one company’s ROI:
Technology is constantly advancing, and the most successful small to mid-size businesses are utilizing ERP systems to set themselves apart from competitors. Finding the right ERP for your business and demonstrating a promising ROI is an exciting step forward for any business owner.
If you have questions about your current system, or want to learn more about how our ERP system can benefit your business, contact us.
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