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ROI of ERP System: What Returns to Expect on Manufacturing ERP Investment

ROI of ERP System: What Returns to Expect on Manufacturing ERP Investment

The decision to implement or upgrade an ERP solution can take your business to the next level.

Modern ERP solution helps reduce the overall operating cost, increase productivity and offer standard features that automate business tasks and save time.

Investing an extensive amount of money in ERP is not a cakewalk. Justifying the budget and large expenditure is a must. The total cost of license, implementation, training, and maintenance cost, all put together is the TCO (Total Cost of Ownership). Estimation of TCO is calculated over a period of years (sometimes 5 to 10).

Another way of justifying the Total Cost of Ownership for ERP implementation is quantifying the benefits of the newly implemented ERP system by estimating ROI of ERP implementation.

The question arises – how to calculate ERP ROI? And why is it important?

When the expected cost of ERP software is compared to the expected benefits (direct and indirect savings) of implementing ERP over a span of time, is the ROI analysis.

ROI is calculated by adding the anticipated returns from ERP and then dividing the resulted amount by the TCO of ERP, the resulting quotient is ERP ROI. The larger quotient, the better it is for business.

erp investment

Calculating ROI of ERP is a daunting task- it’s a combination of fraught along with challenges and misconceptions. That’s why we have mentioned in this blog what are the costs to be considered which can forecast quicker returns on investment.

Determining ERP ROI encourages organizations to outline the cost and plan for the future.

Let’s take a look at these points stating the importance of calculating ROI of ERP implementation.

  1. This justifies your ERP implementation process from a financial point of view
  2. ROI can be one of the most important criteria for selecting the right ERP for your company
  3. ROI lets you measure the expected ERP benefits that can be achieved after the implementation process

ROI is an important part of ERP selection process as it gives you clarity about where your company will be after 5 or 10 years, what will be the rate of productivity, how can it improve in a long and short run and more.

How can you achieve ROI of ERP system?

Here are a few things to consider that can help you derive ROI –

1. Organize your data for better ROI

Evaluating, selecting and implementing ERP generates a huge amount of business data. Connecting dots and bringing together every piece of it is a mind-boggling task. People from every department should give input and act objectively to help counter any bias and ensure consistency.

2. It is better to focus on people, processes and not technology

You can achieve increased ROI by not getting into the web of technological aspects. ERP vendors ensure to upgrade their software and make it more effective by offering state-of-the-art functionality. ROI can be calculated aptly based on how well you manage business process reengineering and organizational change management.

3. Don’t underestimate the time and effort required for your ERP implementation

Setting realistic expectations and forecasting ROI benefits is always a good idea. Estimate the project’s time, cost and effort by taking suggestion from an expert (other than the ERP vendor).

Once the project goes live, businesses can ensure whether they achieved their expected benefits and ROI or not.

4. Forecasting ERP cost

ERP costs such as licensing cost and hardware cost can be easily taken into account. Other than these, there are different types of costs that need to be considered and require efforts for calculation. It includes SaaS subscription, consultancy cost, maintenance cost, and user cost.

When calculating ROI, implementation cost, maintenance cost, licensing, etc. – every small detail matters.

  • How you deploy your solution: Cloud? On-Premises?
  • How many users do you need?
  • What do you need to run your business?
  • What are your implementation and training needs?

You may require a huge amount of time to calculate these costs. Here is the list of costs that can be forecasted prior to investing –

4.1 Out-of-box system price

Many business owners assume that the first ERP cost is easy to calculate. It is just a number that the vendors quote.

Well, it depends on the modules and deployment options your company requires.

  • License fees – on-premise vs SaaS

On-premise ERP software is hosted on the local servers in your organization. Here, a large, one-off licensing fees is required. With on-premise ERP deployment, businesses need to update the servers to ensure its perpetuity and proper working. It also adds up to the licensing cost.

On the contrary, SaaS (Cloud) ERP is hosted on the third-party server remotely and can be accessed via the internet. You have to pay the subscription amount monthly, until the date you use the system. There is no fee for updating ERP. It reflects on the final ROI figure.

4.2 Consultancy costs and vendor implementation fees

Once you finalize the ERP selection, consultants will drive the implementation process.

To calculate ERP cost, it is important to clearly predefine the list of consultancy activities and timeframe to avoid future glitches.

A range of implementation services offered by ERP consultants includes data migration, project management, system customization, etc. Some vendors ask for surcharges for these services. You must have the clarity of which method your vendor chooses.

4.3 Maintenance cost

Your servers and machines should meet the minimum specifications from the vendor. Other than this, timely updates and server upgrade also require additional cost to be paid to the ERP vendor.

Maintenance fees include IT labor cost, additional server cost, and other departmental costs. In addition to this, annual maintenance cost is one of the key factors that cannot be ignored. It gives you access to the breakthrough technologies to surpass the business competition.  

4.4 User cost

Do you know how crucial it is to train your employees for ERP usage? It ensures efficient usage of the software by the end users. Training is a time-consuming process. Its cost needs to be calculated by the organization. Task frequency and length of work by the employees should also be considered as one cost factor.

It is better to manage cost as per the budget. It should never exceed the amount that you have planned. Otherwise, ROI can go down.

Determining the ERP benefits – tangible and intangible benefits

Installation of ERP requires time, efforts and money. Once you get it implemented, the software starts gathering raw business data and transform it into information that is easily understandable and readable.

To calculate ERP return in investment, data should be given a dollar value. It helps in calculating efficiency and increased levels in business processes.

This infographic lists the tangible and intangible returns to expect from ERP investment:

return on investment erp systems

In addition to this, you must know the answers to these questions:

  • How long will I use this ERP system in the future?
  • What are my expected monetary benefits after using it?

It is difficult to calculate tangible benefits in monetary terms as these may fluctuate. However, to ensure ROI, it’s a must to quantify all the business parameters.

Quantify your benefits

As you would expect, more standard selections, versus more customized options, impact your ERP cost. Your ability to choose what is best for your business success today, combined with the confidence your solution can scale to support your continued growth….is priceless.

The key to business profitability is to change and enhance business processes and fill the gaps to improve efficiency and overall productivity.

The first step of calculating ERP ROI is, to sum up the total cost (TCO) of ERP software over a specified period, as we mentioned above.

The second step is to guesstimate the anticipated benefits over a certain period of time. To put down these benefits into figures, you need to have a scrum meeting with your employees, and research on annual survey reports. In simple words, benefits occur from reduction of operating cost, inventory cost, labor cost, and improved production (as these points directly affect the profit and loss of the company).

It goes without saying that performing ROI analysis for ERP system is quite intimidating when it comes to calculating unquantifiable figures. ROI measurement helps you forecast future business plan and increase the chances of successful ERP project completion.

Some of the immeasurable returns you can expect from ROI of ERP investment are:

  • Improves staff retention
  • Effectively fixes errors
  • Single source of truth on a centralized platform
  • Increased visibility nurtures quick decision-making

If you are pondering over the question – how long does it take to see a Return on an ERP investment and how can it help your organization grow, please contact us here.