Enterprise resource Planning (ERP) systems were unfamiliar to businesses until a few years ago when they started enjoying their benefits. With an ERP implementation, many organizations have significantly observed discipline in their operations, productivity, and decision-making .
Any business planning to implement ERP into its ongoing operations or set up a whole new process must be prepared financially to invest. It must be known that direct benefits will be visible after a few months. All the efforts and process streamlining will be reflected with the realization of return on investment (ROI) within a year or two. This makes calculating the ROI an important factor in measuring your business success.
This guide can help you break down the ROI on ERP license, implementation, maintenance and value proposition into bite-size pieces, making it easier to evaluate ERP software and its value over time.
Why ROI Matters in ERP Implementation
The capability to calculate ROI is not just a financial metric but a strategic tool that will give you clarity on the feasibility of spending on an ERP system. By understanding the ROI, companies will be able to:
- Justify the ERP implementation costs to the stakeholders.
- Understand the difference in resource utilization before and after the ERP implementation.
- Evaluate the effectiveness of the ERP system from a business goals perspective.
How to Calculate ROI for ERP System Implementation
Step 1: Find the Total Cost of ERP Implementation
Knowing the ERP implementation costs is the first step to calculating ROI. The miscellaneous costs included are:
- Software Costs: This includes licensing fees, subscription rates, implementation, and integration with existing legacy software for the ERP software.
- ERP Infra Costs: Essential ERP installation infrastructure like hardware, software, manpower etc necessary to install and run the software.
- Training Costs: Training employees on how to use the new ERP system.
- Ongoing Costs: Support fees, maintenance, and upgrades.
Many reputed ERP software providers offer scalable solutions. SourcePro Infotech Pvt. Ltd. is a leading provider of scalable ERP solutions in the Indian market that can help you estimate the cost by factoring in the pre-and ongoing expenditures that matter. For people who want to know more about the ERP implementation process, read our blog on the 5 Stages of a Successful ERP Implementation.
Step 2: Set Tangible Benefits of ERP
ERP systems can benefit different types of businesses in different ways, which include:
- Improved efficiency by reducing operational costs.
- Improved data accuracy that leads to better decision-making.
- Reduced inventory costs from real-time stock tracking.
- Increased productivity through automation.
Businesses must quantify these benefits wherever possible. For instance, investment saved on inventory, calculate the time employees save by automating repetitive tasks or the revenue growth rate with improved sales data insights.
Step 3: Calculate the Intangible Benefits of ERP
The benefits of reduced errors & rework, employee satisfaction, improved customer service, or regulatory compliance are hard to measure. However, they must be considered when calculating the success of ERP implementation.
Step 4: Calculate the Revenue Gains From the ERP System
The success of your ERP implementation has a direct impact on revenue. It also positively affects customer satisfaction and reciprocating market demands. For instance, if you have a revenue increase of 10% in a year, post the ERP implementation, it can be a significant factor to consider during the ROI calculation.
Step 5: Assess Payback Period
The payback period is the recovery time after investing in an ERP system. Calculate the time the system takes to recover the total investment. It can be calculated by dividing the net benefit by the net incurred cost.
Step 6: Use the ROI Formula
Here’s how you calculate the ROI:
ROI (%) = (Total Benefits – Total Costs) / Total Costs x100%
Consider this example:
Total Costs: The cost is ₹200,000 (including costs of software, implementation, training, and maintenance).
Annual Benefits: ₹100,000 (savings + savings from revenue gains).
ROI is [ (₹100,000 x 5 years – ₹200,000) / ₹200,000 ] × 100 = 150%.
A 5 year ROI of 150% is quite a profitable investment.
Step 7: Optimize, Monitor and Control Post-Implementation
ROI isn’t static. Monitor the ERP system’s performance and ensure it delivers the expected benefits. There are also places to work by optimizing the system to enhance efficiency and reduce costs.
Common Pitfalls in Calculating ROI of ERP Implementation
- Underestimating Costs: Ensure all direct and indirect expenses are regarded during the cost calculation phase.
- Overlooking Training: Employee training costs may increase, affecting your ROI calculations.
- Ignoring Intangible Benefits: While it is tough to measure intangible benefits, they are essential to a successful ERP implementation.
How SourcePro Can Help
Before implementing an ERP system into your organization’s operations, you must think and plan. Understanding your business needs and goals is vital to choosing an appropriate ERP solution. At SourcePro Infotech Pvt. Ltd., our ERP solutions are designed to improve your ROI dramatically. Our ERP software is user-friendly, scalable, and combined with features to benefit your organization for a long time.
Moreover, we offer end-to-end support to ensure a smooth transition. We encourage you to discuss your unique needs with our experts so that we can provide customizable solutions to help you achieve the most from the ERP implementation.
Conclusion
We believe that a successful ERP implementation isn’t sufficient. Businesses must be satisfied when enjoying the benefits and maximizing their ROI. This blog covers the most essential factors to consider when calculating ROI on ERP implementation. However, a planned strategy is paramount to make the entire process seamless. With SourcePro, your organization can witness the full potential of ERP solutions and significantly increase ROI.
Start your journey to transform profitability in your organization! Consult with our experts today.
