The ROI of ERP: the true investment of an ERP solution
1st July, 2016
Keeping it simple when you’re discussing the Return On Investment (ROI) of a process, tool, or product with your senior leadership allows you to quickly overview benefits.
But when it comes to Enterprise Resource Planning (ERP), there’s no denying some complexity in defining the investment side of the ROI equation.
Below are five key factors that can impact the investment and costs you’ll be considering.
1. Hardware acquisition and/or upgrade hardware
Traditional ERP software would have been installed on existing IT infrastructure, the only option. However, the availability of cloud-based ERP solutions, Software as a Service (SaaS) configurations, and Cloud Service Providers now allows for many ERP software acquisition, deployment, and usage options.
You and your IT team will have to choose which solution is best for your business. If it is on-premise, you may have to upgrade or acquire computer hardware, additional servers and/or telecommunication equipment.
The ROI calculation needs to identify and include such equipment. Typically, computer hardware is purchased, recorded on the balance sheet as an asset, and depreciation is calculated over its useful life. The positive impact of the additional depreciation in terms of reduced taxes, or improved cash flow should be captured as a benefit (Return) in the ROI calculation.
2. Software acquisition
In the past, software was treated the same way as hardware purchase, in that the purchase of a software license was capitalised and depreciated over its useful life. However, SaaS subscription configurations have dramatically changed the manner in which ERP software is acquired and used.
The difference in treatment of the software acquisition cost in an on-premise arrangement or a SaaS arrangement can have a significant impact on the calculation of ROI. This decision needs to be made prior to defining ROI on an ERP implementation. Speak to your financial team to clarify your options.
3. Software customisation cost
Even when an ERP product has a good “fit” to an organisation’s needs, some customisation of that software may be necessary. The good news is that some of the customisation costs of ERP implementations can also be capitalised and depreciated, adding to the financial benefit of the ROI calculation.
The bad news is that perhaps no single ERP implementation cost component is more underestimated than the cost of software customisation.
When first deciding on a solution this is often the furthest thing from one’s mind. Only years down the track does one realise that no other cost component can scuttle an entire ERP project or so drastically impact ROI calculations. Moreover, software customisations can grow almost exponentially, adding to implementation time and delaying the realisation of the benefits sought from the ERP investment.
It will save you many headaches and explanations later on to exercise great care and accuracy when estimating the full scope, time, and cost of ERP customisation efforts.
4. Project management and implementation cost
While the all-up costs of the implementation efforts cannot be capitalised as part of the acquisition cost from an accounting point of view, many of these costs should be identified and included as part of the investment piece of the ROI calculation.
The cost of external consulting or project management services should be included, as well as the cost of training and the cost of any temp services to fill personnel gaps during the implementation. Initial training and data conversion costs should also be identified, estimated, and included as part of an ERP implementation cost.
READ THIS: 9 step ERP implementation plan for business operators
5. Ongoing costs
Even after an ERP system is implemented, it will need to be maintained.
Software maintenance fees are usually defined when an ERP system is purchased, whether in an on-premise or SaaS configuration. Costs should be estimated for the useful life of the software and included in the ongoing expense as incurred. The cost of training new staff, or re-training existing staff when software upgrades are installed, should also be estimated and included as an ongoing expense of maintaining (and maximising) your ERP investment.
With due diligence, a complete and accurate ROI assessment will ensure that your company asks the right questions and makes the right decisions up front, acquires the best ERP system for your needs, and is empowered to fully realise the benefits of a new solution.