Enterprise resource planning : Evaluate your return on investment
Why should you anticipate your ERP ROI before the implementation?
Investing in an enterprise resource planning solution can be a costly and long process that shouldn’t be taken lightly. Therefore, being able to evaluate the return on investment (ROI) is a good way to get a deeper understanding of the company’s long-term strategy and how the ERP can meet those expectations.
Maybe the most valuable asset of thinking your ERP project from a ROI approach is that it will allow a shift of points of view. This means that, from seeing the implementation as an expensive and long project, the investment in the new ERP will be seen as a monthly loss for not being already implemented. But evaluating the return on investment of a tool impacting so many aspects of the company is not an easy task and many mistakes are to be avoided. One major misinterpretation of ROI evaluation is to consider only performance indicator involving money.
In fact, many aspects of a well-implemented ERP software will impact employees and customers that will ultimately have a financial impact, but proper metrics should be anticipated to measure those aspects more directly. Finding the right metrics at the first place will allow to:
- Avoid misinterpretations.
- Give a better understanding of the company.
- Provide a good comprehension of the ERP’s impacts.
- Build foundations to evaluate the success of your ERP.
- Estimate the right software solution and investment for the implementation
What are the main cost and benefits to consider?
For every company, the solution will be different, every implementation is unique, it would be imprecise and dangerous to give an estimation of what ROI can be expected from an ERP solution globally. However, some specific key metrics should be highlighted considering costs and earnings.
1- Expected Cost
What criteria should you think about?
- Internal and external human time spent regarding implementation.
- Maintenance on the long run.
- The price of the solution itself (licenses).
- How long will it take for the employee to master the tools?
- The performance level of the solutions (loading time, accessibility, autonomy and personalization…).
- The impact on production of the implementation and learning process.
2- Expected benefits.
To evaluate the tangible benefits of a successful ERP implementation, it is important to evaluate what layer of the company will be impacted the most and how easy it is quantify them a priori and a posteriori. It is important to think about the impact of the implementation at every level of the company and identify all stakeholders :The company as a whole (Departments Teams Employees Customers Partners, etc.) For each of them, it is important to know in what way the enterprise resource planning system will have a major impact: Communication, decision-making, fidelity, satisfaction, commitment, time saved, reporting, …
3- Two questions will then arise:
- “What is quantifiable/tangible (like time loss reduction) and what is not (like decision-making)?”
- “What is predictable (like process improvement) and what is not (like client satisfaction)?”
When those 3-step methodology has been done properly, it becomes possible to identify which metrics is the most relevant to evaluate the ERP return on investment at different time scales. Those indicators will also provide good reporting tools to estimates if the ERP is offering the improvements expected afterwards.
Avoid Common Mistakes
Getting the right estimations of your ROI is an important part of the decision process when implementing an ERP becomes an option. It’s tempting to use simple solutions out of the box that will save a lot of time at first but will reflect neither your company at its actual state nor what would be your company after the implementation. The main strength of ERP systems is that they will be bent to fit the company with its specificity. Therefore, you can’t really expect to get a proper estimation of your enterprise resource planning ROI without inspecting how the solution will impact your company. We talked about key elements that you should take into account, but it is also important to identify what you should avoid.
- You should not consider your ROI exclusively in terms of money, use multiple kinds of metrics.
- Do not over estimate the value of an out of the box online ROI calculator
- The implementation involves a shift of behavior. Using the same process as before in a post ERP implementation situation can lead to a worse performing situation.
- It’s important to identify weaknesses before the implementation to avoid repeating those issues inside the new system.
- The integration is too often done by inexperienced personnel or consultant without the proper understanding of both the company or the software.
Find the right metrics by asking the right questions
Understanding what are the right metrics for your company is the key to properly evaluate the Enterprise resource planning return on investment. A good way to do so is to ask some simple questions about the future of the solution in the company, understand the time scale for each and priorities:
- How will it impact customer satisfaction?
- What will be the impact on the market share?
- Will it reduce expenses?
- Will it increase revenue?
- How will it impact inventory?
- Will it impact the order-to-delivery cycle time?
- What will be the impact in terms of competitiveness?
- Will it change the human and material management?
- Is somebody responsible for monitoring and leading the business performance goals fixed?
- What are the right metrics to identify if the implementation is leading to improvement in terms of strategic and tactical approach?
The idea of the ROI calculation is to delineate the main targets to be achieved and how the ERP can provide the proper solutions to achieve those goals. The ROI can be a long process but “if you can develop and apply reasonable metrics to intangibles such as customer satisfaction, communication, decision cycle time, decision-making quality, cycle time, delivery performance, etc., then it is very likely the economic impact [of the ERP implementation] can be reasonably predicted.” [Mike Donovan]