How to Calculate Return on Investment for ERP Systems

Enterprise resource planning (ERP) systems are software solutions that help organizations manage their core business processes, such as accounting, procurement, project management, supply chain, and more. ERP systems can provide many benefits for businesses, such as improving efficiency, productivity, visibility, and collaboration. But how can you measure the value of investing in an ERP system? How can you compare the costs and benefits of different ERP options? How can you justify your ERP project to stakeholders and decision-makers?

One way to answer these questions is to use a return on investment (ROI) analysis. ROI is a common method used in business to evaluate the profitability of an investment by comparing its expected returns with its expected costs. ROI can help you assess the financial impact of an ERP system on your business and compare it with other potential investments or alternatives.

What is ROI and how is it calculated?

ROI is a ratio that measures the net income or savings generated by an investment relative to its total cost over a given period of time. The basic formula for calculating ROI is:

ROI=TotalCostNetIncome​×100%

Net income is the difference between the benefits and the costs of the investment. Benefits are the positive outcomes or results that the investment produces, such as increased revenue, reduced expenses, or improved quality. Costs are the negative outcomes or expenses that the investment incurs, such as acquisition, implementation, maintenance, or operation costs.

Total cost is the sum of all the costs associated with the investment over its lifetime. This includes both upfront and ongoing costs, such as software licenses, hardware, consulting fees, training, support, upgrades, etc.

For example, suppose you invest $100,000 in an ERP system that generates $150,000 in net income over five years. Your ROI would be:

ROI=100000150000​×100%=150%

This means that for every dollar you spend on the ERP system, you earn $1.50 in return.

What are the challenges and best practices of calculating ROI for ERP systems?

Calculating ROI for ERP systems can be challenging for several reasons. First, ERP systems are complex and multifaceted solutions that affect many aspects of a business. This makes it difficult to isolate and quantify the specific benefits and costs that are attributable to the ERP system. Second, ERP systems are long-term investments that require time to implement and realize their full potential. This makes it hard to predict and measure the future benefits and costs that will occur over the lifespan of the ERP system. Third, ERP systems are dynamic and evolving solutions that adapt to changing business needs and environments. This makes it challenging to account for the variability and uncertainty of the benefits and costs that may arise from different scenarios and assumptions.

To overcome these challenges and conduct a reliable and realistic ROI analysis for ERP systems, here are some best practices to follow:

• Define your goals and objectives: Before you start calculating ROI, you need to have a clear idea of what you want to achieve with your ERP system and how you will measure your success. You need to identify your pain points, challenges, opportunities, and expectations that motivate your ERP project. You also need to define your key performance indicators (KPIs) that will help you track and evaluate your progress and results.

• Gather data and information: To calculate ROI, you need to have accurate and relevant data and information about your current situation and your future expectations. You need to collect data about your current business processes, performance, costs, and issues that you want to improve with your ERP system. You also need to gather information about your potential ERP options, features, benefits, costs, and risks that you want to compare and evaluate.

• Estimate benefits and costs: Based on your data and information, you need to estimate the benefits and costs of your ERP system over a reasonable time frame (usually five years or more). You need to consider both tangible and intangible benefits and costs that are directly or indirectly related to your ERP system. Tangible benefits and costs are those that can be easily measured and expressed in monetary terms, such as revenue growth, cost savings, or productivity gains. Intangible benefits and costs are those that are difficult to measure and express in monetary terms but still have value for your business, such as customer satisfaction, employee engagement, or competitive advantage.

• Communicate and present ROI: Finally, you need to communicate and present your ROI analysis to your stakeholders and decision-makers. You need to prepare a clear and concise report that summarizes your findings and recommendations. You also need to use visual aids, such as charts, graphs, or tables, to illustrate your data and information. You should highlight the main benefits and costs of your ERP system, as well as the risks and challenges that may affect your ROI. You should also address any questions or concerns that your audience may have about your ROI analysis.

ROI is a useful tool to measure the value of investing in an ERP system for your business. By following the steps and best practices outlined in this article, you can conduct a reliable and realistic ROI analysis that will help you compare and evaluate different ERP options, justify your ERP project to stakeholders and decision-makers, and monitor and improve your ERP performance over time. However, ROI is not the only factor to consider when choosing an ERP system. You should also take into account other aspects, such as your business needs and goals, your organizational culture and readiness, and your vendor’s reputation and support. Ultimately, the best ERP system for your business is the one that meets your expectations and delivers the results you want.

Until Next Time…