Considering your first ERP system, here are things to think about

Enterprise resource planning (ERP) systems are powerful software solutions that can integrate core business functions, such as finance, inventory management, manufacturing, sales, project management and human resources, with a single, unified platform that provides centralized access to critical data. With greater visibility into these functions, business leaders can increase efficiency, reduce costs and unlock new growth opportunities.

But investing in an ERP system is not a trivial decision. It requires a significant amount of time, money and resources to implement and maintain. It also involves a major change in the way your business operates and communicates. Therefore, before you embark on your ERP journey, you need to consider how to measure its return on investment (ROI), which is the ratio of the net benefits to the total costs of the project.

ROI is a common method used in business to evaluate the profitability and feasibility of different investments. However, calculating the ROI of an ERP system can be complex and challenging, as there are many factors that need to be taken into account.

In this article, we will break down some of the key things to think about when considering your first ERP system and its ROI.

Why do you need an ERP system?

Before calculating the ROI of an ERP system, you need to establish why your business needs an ERP system in the first place. What are the pain points or challenges that you are facing with your current system or processes? What are the goals or objectives that you want to achieve with an ERP system? How will an ERP system support your business strategy and vision?

The following are some of the common benefits that an ERP system can bring to your business, and how they can translate into tangible or intangible returns:

• Data stored in a common database. An ERP system collects data from across your organization and stores it in a common database. This allows you to have a single, accurate and integrated view of your business operations, from back-end finance processes and warehouse operations to lead generation and sales success. This can help you improve data quality, consistency and security, as well as reduce data duplication and errors. It can also enable faster and easier reporting and analysis, as well as real-time access to key performance indicators (KPIs) and metrics.

• Unified view limits silos. Working with a unified view of your organization breaks down data silos and improves collaboration and communication across different departments and functions. This can help you streamline workflows, optimize processes and eliminate bottlenecks. It can also enhance decision making, as you can have a holistic understanding of your business situation and performance, as well as access to relevant and timely information.

How much will an ERP system cost?

Once you have identified why you need an ERP system and what benefits it can bring to your business, you need to estimate how much it will cost to acquire, implement and operate the ERP system. This is the total cost of ownership (TCO) of the ERP project, which includes both direct and indirect costs.

The direct costs are the upfront and ongoing expenses that are directly related to the ERP system, such as:

• Software license fees or subscription fees. This is the cost of purchasing or renting the ERP software from the vendor or provider. Depending on the type of ERP system you choose, you may pay a one-time fee, a recurring fee or a combination of both. You may also pay additional fees for add-ons, customizations or integrations.

• Hardware costs. This is the cost of acquiring and maintaining the physical equipment and infrastructure that are required to run the ERP system, such as servers, computers, network devices and security systems. This cost may vary depending on whether you choose an on-premise, cloud-based or hybrid ERP system.

• Implementation costs. This is the cost of installing, configuring and testing the ERP system, as well as migrating data from your existing system to the new system. This cost may include hiring external consultants, contractors or vendors to assist with the implementation process, as well as training your internal staff on how to use the new system.

• Maintenance and support costs. This is the cost of keeping the ERP system up and running, as well as resolving any issues or problems that may arise. This cost may include paying for software updates, patches, bug fixes and security enhancements, as well as technical support and help desk services from the vendor or provider.

The indirect costs are the hidden or opportunity costs that are not directly related to the ERP system, but may affect your business performance or profitability, such as:

• Downtime costs. This is the cost of lost productivity, revenue or customer satisfaction due to disruptions or delays in your business operations caused by the ERP implementation or maintenance. This cost may include compensating your customers for any inconvenience or dissatisfaction, as well as repairing any damage to your reputation or brand image.

• Learning curve costs. This is the cost of reduced efficiency, quality or accuracy due to your employees’ unfamiliarity or lack of proficiency with the new ERP system. This cost may include correcting errors or mistakes, redoing work or tasks, or dealing with customer complaints or returns.

• Adjustment costs. This is the cost of modifying or adapting your business processes, policies or procedures to align with the new ERP system. This cost may include revising your workflows, roles or responsibilities, as well as communicating and enforcing any changes to your employees, customers or partners.

How much will an ERP system save?

After estimating how much an ERP system will cost, you need to estimate how much it will save or generate for your business. This is the net benefit of

the ERP project, which includes both tangible and intangible benefits.

The tangible benefits are the measurable and quantifiable savings or revenues that result from the ERP system, such as:

• Reduced operational costs. An ERP system can help you lower your operational costs by streamlining your workflows, optimizing your processes, eliminating redundancies and errors, and automating manual or repetitive tasks. This can help you save time, money and resources, as well as improve your productivity, quality and accuracy.

• Reduced inventory costs. An ERP system can help you reduce your inventory costs by providing real-time visibility into your supply chain, inventory levels and customer demand. This can help you avoid overstocking or understocking, as well as reduce waste, spoilage and obsolescence. It can also help you improve your inventory turnover, fulfillment and delivery.

• Increased sales and revenue. An ERP system can help you increase your sales and revenue by enhancing your customer experience and satisfaction, as well as supporting your marketing and sales efforts. This can help you attract new customers, retain existing customers, increase customer loyalty and referrals, and boost cross-selling and upselling opportunities.

• Improved compliance and risk management. An ERP system can help you improve your compliance and risk management by ensuring that your data, transactions and records are accurate, consistent and secure. This can help you avoid fines, penalties or lawsuits, as well as protect your reputation and brand image. It can also help you comply with industry standards, regulations and best practices.

The intangible benefits are the immeasurable and qualitative improvements or outcomes that result from the ERP system, such as:

• Improved collaboration and communication. An ERP system can help you improve your collaboration and communication by breaking down data silos and enabling information sharing across different departments and functions. This can help you foster teamwork, innovation and creativity, as well as resolve conflicts or issues faster and easier.

• Improved decision making and strategic planning. An ERP system can help you improve your decision making and strategic planning by providing data-driven insights and analytics into your business performance and situation. This can help you identify trends, patterns and opportunities, as well as evaluate risks, challenges and alternatives. It can also help you align your goals, objectives and actions with your business strategy and vision.

• Improved competitiveness and growth potential. An ERP system can help you improve your competitiveness and growth potential by enabling you to adapt to changing market conditions, customer expectations and business needs. This can help you gain an edge over your competitors, differentiate yourself from others, and expand into new markets or segments.

How to calculate the ROI of an ERP system?

To calculate the ROI of an ERP system, you need to compare the net benefit of the ERP project with the total cost of ownership of the ERP project over a certain period of time. The formula for ROI is:

ROI = (Net Benefit - Total Cost) / Total Cost

The net benefit is the difference between the total benefit (tangible + intangible) and the total cost (direct + indirect) of the ERP project. The total cost is the sum of all the direct

• and indirect costs of the ERP project.

• The ROI can be expressed as a percentage or a ratio. A positive ROI means that the net benefit is greater than the total cost, which indicates that the ERP project is profitable and feasible. A negative ROI means that the net benefit is less than the total cost, which indicates that the ERP project is unprofitable and infeasible.

• To make your ROI calculation more accurate and reliable, you need to use realistic and verifiable data and assumptions, as well as consider a reasonable time frame for the ERP project. You can also use an ERP ROI calculator to help you estimate your costs and benefits, as well as compare different ERP options and scenarios.

An ERP system can be a valuable investment for your business if you choose the right solution that fits your needs and budget. By considering the benefits, costs and ROI of an ERP system, you can make an informed decision that will help you achieve your desired outcomes. However, calculating the ROI of an ERP system can be complex and challenging, so you may need to seek professional guidance and assistance from experts or consultants who have experience and expertise in ERP implementation and evaluation.

If you are considering your first ERP system, or want to learn more about how an ERP system can help your business grow and succeed, contact us today. We are a leading provider of cloud-based ERP solutions that can help you streamline your workflows, optimize your processes, improve your customer satisfaction and loyalty, and increase your sales and revenue. We can also help you calculate the ROI of an ERP system and provide you with a customized demo and quote. Don’t wait, get in touch with us now and see how we can transform your business with an ERP system.