Why ERP ROI is quietly forgotten?

Casually I was searching for “ERP ROI” in google. To my utter surprise, my observations are as follows:

  • It were all very old articles. (May be no one is talking about ROI of ERP now.)
  • Found some ERP calculation methods. Many were written by ERP consulting firms.
  • Found couple of ERP vendors who have provided some theoretical parameters on this topic in 2011.
  • In the first 5 pages, could not find any large ERP vendors talking on this.

Why is that people are not talking about ERP ROI?

This is deliberate and intentional. The analogy is as follows:

  • There are so many so called ERP solution in the market. Due to lack of proper features and strategy, they are not sure as to when the ERP software will be implemented. So for them ROI of ERP is a distant dream.
  • Also many Accounting & CRM software companies call themselves as ERP software. Such software has some features of all the modules here and there, just to fool the customers. In this case there is nothing called ROI of ERP.
  • Some of ERP software companies works on different model. ERP license is sold by company A and walks out with their money. Company B will come and start system study, customisation and implementation, keep billing the client month after month. Here both A & B are not interested in talking about ROI of ERP for the client. Smart people, they are interested about their ROI. In this case, the cost of ERP, Implementation, Hardware & Networking, added to that AMC cost is so high, it will be a nightmare to see the ERP ROI. In some cases, there may not be any +ve ROI atall.

How to calculate the ERP ROI?

There are many ways that the ROI can come from an ERP implementation. In a typical manufacturing industry, the ERP ROI can come from these heads.

Cost Heads:

  • Cost of ERP software
  • Cost of Hardware, OS, DB and other software / Cost of Hosting
  • System administration
  • Cost of Training & Implementation
  • Scope of Customisation & Cost. ( Too much of Customisation means 2 things. 1. the software is not a ready one. 2. this will cause delay of the project)
  • Time frame for Implementation. ( Shorter the time for implementation, higher the chance of ERP success)
  • AMC Cost

Calculate the cost of ERP investment for 5 years.

Savings from:

  • Purchase & Inventory
    • ABC analysis (to control stocks of the high value items).
    • Non-Moving stocks (to liquidate stocks).
    • Material requirement Planning  ( SO, BOM, PO, WIP and Inventory linked).
    • Auto Indent for regular consumables.
    • Avoid stock-outs.
    • Vendor evaluation with price, on-time delivery and quality.
    • Vendor development.
    • Lock prices for A value items.
    • Price comparison.
  • Customer Management
    • Sales Enquiry tracking.
    • Offer (speed-up offer with BOM, PO linked costing by click of a button).
    • Sale order delivery dates monitoring.
    • Bills Aging (instant data to AR team to followup with clients closely).
    • credit control to avoid bad-debts.
  • Production
    • Production rejections.
    • Excess consumption.

Take the figures for the past 12 months with Sales figures. After implementation keep comparing the same. You will know the trend.

Keep comparing the figures between Cost and Savings for every month to know the ration between  ERP Investment Vs Return On Investment of ERP.

Conclusion:

It is recommended for every organsation to check their ERP solution payback. This is the health range of ERP ROI.

1-6 months – Excellent.

7-12 months – Good.

13-24 months – Average.

25 and above – poor.

 

Author Vijay

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Join the discussion 2 Comments

  • Ravi gadgil says:

    ROI on ERP may be myth.
    When you calculate every last penny spend (directly and indirectly)… it becomes so high that decision makers simply keep away from tracking ROI.. or it is complex and not practical to derive ‘hypothetical’ ROI.
    The cost of changes to business processes/cost of retraining the resources/creating new work instructions/developing integration/interfaces with other systems/one time cost of redundancy(if any) is never taken into account while projecting ROI.

    • Vijay says:

      If ROI on ERP is a myth, that defeats the purpose of ERP itself. In an enterprise every piece of business investment has to have an ROI. So ERP cannot be an exception.

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