How to measure Investment in ERP

Most businesses that have considerable amount of daily transactions struggle to keep control, and reporting on business performance timely; without a reliable system. When systems used are built around the specific business itself, address key areas to help users rely on it not on other parallel applications or excel sheets. Therefore, businesses start shopping about the best ERPs to match their needs, department specific requirements, and here start the problems, pain and uncertainty.

When to Invest in ERP?

Do you as a company really measure ROI of planned ERP before jumping into that painful journey? If not, then think twice, because this is a similar investment decision where you measure benefits against costs to take informed decision.

In this guide we’ll shed some light on key costs and benefits to help decision makers analyze the process of migrating to ERP and measure performance against budget. Regardless of license whether Cloud or on premise costs to be calculated might be as outlined below: 

Costs to be considered

Direct acquisition costs

Most software applications are sold on modules: GL, AR, Purchasing, Sales, etc… defining the number of modules needed to run your business is very important because you are sure you don’t want to start a half-baked system, or pay for non-used assets.

Licenses

Simply number of users: some systems define the price for their application by number of both users, and modules. Precisely work out with departments to assign number of users who will have full access to the system and those who will have shadow access, like inquiry or reporting, optimize use as much as possible.

Implementation costs

Before ERP implementation starts, there should be a plan of man days, cost, and time plan. Your cost should be addition of all above plus your staff cost during the same period. Of course not all employees will be allocated to the project, however using a Gantt chart you’ll be able to allocate internal resources according to milestones. Account for overtime pay, and may be external support teams i.e. outsourcing.

Consulting fees

Consultancy services during the project are very important value for money aspect, they help in the smoothing out the implementation, selling the idea to internal teams, magnify benefits for all, and most importantly help you redesign business processes to fit within the system. 

Project Management

Such a project to succeed must have “project management team”, we’ve been in such business for the last 20 years, and we’ve seen many companies struggle, while others flourish, the key differentiator is people change management. Sell it before you buy it! Project Management Team should include internal ambassador from almost all departments. Whether using independent project manager or from internal teams, calculate the costs and add to the equation.

Maintenance & support

Every investment require maintenance: To keep it flowing and used properly system maintenance has to be carried out regularly using experts, most probably through the implementation partners. Trouble shooting is key measure of people morale, the quicker problems are addressed and resolved, the confidence by people increase in the system and management decisions. Most maintenance and support costs equal around 20% of system acquisition or implementation cost.

Upgrades

You buy, then enhance it. Business terms, conditions, technology evolve, hence keeping your system alive and breathing is the only way you keep generating returns out of it. Upgrades are equally important like the initial acquiring the ERP system. Keep an eye on such future costs and include in the total costs.

Training

People are enemies of what they don’t know!

Teach them, regularly. Keep the knowledge flowing within the organization and always highlight the benefits. Carrot and stick is still the way people understand management demands. Keep rewarding the out-performers during the project, and try to keep training others, letting them know that hidden agendas are not of the company culture. Add such costs to the formula.

Hardware required

Sometimes it is required to upgrade or buy certain equipment or network infrastructure to accommodate the new system. Define the investment in this category and include the depreciation of such investment in the ROI calculation.

Calculate Benefits

Efficiency gained in:

The umbrella for all the benefits might be the efficiency gained through adapting a full reliable ERP. Because it brings all departments under one roof, helping them not to repeat transactions, transparency, and responsibility.

Production

Knowing costs precisely per product / batch or group of activities will enhance production and costing of products. Allocating costs to the right pockets of cost category and assigning such cost to the relative product will inform management to optimize production wisely.

Distribution

Retail industries, or industrial products that require shipping and distribution are well informed by the ERP system of total cost per product, cost per client, and hence profitability measure. Not being informed timely might not help companies price products correctly.

Inventory

The most affected category of asset (and cost in the P&L) is inventory. Ability to measure and value inventory accurately and timely on each month end closing should be just another business day. Identifying slow moving items and inform supply chain team about the cost of keeping inventory longer will help them and other departments take informed decision to sell at lower profit margin, while optimize cash flow.

Employment

Efficiency immediately reflect on number of employees who should be saving lots of their time, allowing management to allocate them to a different value adding functions.

Collection

Timely billing and shipping will accelerate company delivery of service / goods, hence allowing company to receive collection earlier.

Purchasing

ERP help companies consolidate purchasing for the group or for the entity at large, and keeping track of vendor’s performance, help in negotiation of prices especially upon timely payment and optimized orders

Effectiveness gained in:

Some other measures of benefits might be correlated to the ERP as by-product. 

Less errors

Employees are not using manual processes, that’s why they normally reduce errors significantly. It can be measured before and after the ERP implementation.

Controls enhanced (reduced Fraud)

Inventory controllers, can sense the change they find after adapting a robust ERP that can help them control transactions timely. The lost, or obsolete items will now have tracing line, although it will not eliminate fraud completely, but it will make it difficult after adapting the ERP together with internal control procedures.

Morale!

This indirect result of people interaction with the ERP after implementation is easily witnessed by directly asking employees about their feedback, time consumed doing a transaction, or after reviewing dashboards.