Published on: June 16, 2014
The decision to invest in any type of business software solution should never be taken lightly. It is a significant investment that requires a lot of attention to detail, the right business environment, and adequate time to be considered successful. Even as the economy continues to show signs of improvement, it is wise to carefully assess the software’s benefits against your company’s needs before making any kind of purchasing decision. Creating a strong case for any new software investment is imperative, as it will convince executives of the felt need and intended gains. Solid facts, a thorough cost and return analysis, and a summary of the expected benefits should be prepared and presented to your company’s executives if you believe a new business solution, such as ERP software, is required. While it may seem like a lot of work, these facts and figures will help executives answer the most important question on their mind: what is the expected return on investment (ROI)?
The answer to this question is not difficult; it just requires a little work. While you cannot easily quantify intangible ERP benefits, you can calculate a simple ROI by dividing the monetary gain (minus the cost of investment) by the total cost of ownership (TCO). Here are a few tips to help you determine the ROI of your future ERP project and gain the support you need:
- Calculate the costs (TCO). The cost of your ERP project will consist of more than the price of the actual software. While this is certainly a starting point, you need to consider the total cost of the project altogether. Be sure to include the following in your total cost analysis: maintenance fees, additional software licenses, hardware costs, consulting fees, internal labor costs, and additional implementation costs. It is also wise to take into account potential profit loss you may experience during the implementation and training process.
- Add up the tangible benefits. Make a list of the tangible benefits you expect to achieve through ERP and calculate the corresponding financial gain. Keep in mind that these benefits do not come from simply installing the software. They are the result of the improved business processes as a result of installing the software. Some tangible benefits you could include are:
- Reduced labor costs through improved efficiency and allocation
- Reduced materials costs through improved accounts payable processes
- Reduced inventory levels through improved forecasting and planning
- Minimized product shortages and interruptions through improved scheduling and production
- Add up the intangible benefits. The intangible benefits are harder to estimate due to their more speculative nature. Although they are very real in all ERP implementations, many companies have a hard time estimating their worth prior to implementation. Here are a few intangible benefits that can be achieved through an ERP implementation:
- Improved compliance
- Integrated and streamlined business processes
- Improved accounting processes
- Improved customer service and satisfaction
- Allow for time in your estimates. One of the most important pieces of advice we can give you when it comes to calculating ERP ROI is to account for time. You won’t expect to completely pay off costs right away, so don’t include it in your ROI. How much time to allow your ROI analysis to run will vary depending on your company’s unique circumstances. Keep in mind that it takes several years to see an actual return on your investment so calculate your ROI accordingly.
A well thought out ROI analysis and an analysis of the expected business benefits can convince executives of the need to invest in ERP software. If your company is in the market for ERP software and you’re looking for the right solution for the job, contact us today. We provide a variety of ERP solutions, such as Sage 100 ERP, Sage 300 ERP and Acumatica Cloud ERP, to help businesses just like you achieve true business efficiency and success. Give us a call today to discuss your company’s unique ERP needs.