With the emergence of cloud-based ERP, enterprise resource planning solutions no longer are just for Fortune 500 companies. That’s part of why almost half of all companies have, or are planning to implement, an ERP system.
Google “what is ERP” and you’ll find a wealth of results offering answers. But there’s one topic that’s conspicuous in its apparent absence—the ROI of ERP. You may find brief pieces scattered here and there, but there’s a lack of deep-dives.
And that’s strange considering how important ROI is for technology investment, and how much ERP changes a business. With something so foundational, you would expect more ROI discussion.
Why Nobody’s Talking About ROI
There are several reasons why ROI might not be a part of the discussion. Much of it probably comes down to some version of the scale of business transformation that comes from a new ERP system.
Here are three good reasons why ROI is not in the ERP discussion more.
- The Value of ERP is Self-Evident
ERP solutions touch all aspects of a business and significantly transform business processes, operational visibility and automation. When a company looks at the full scope of what comes with ERP from a benefits perspective, it usually is immediately apparent that ERP will prove a significant technological asset.
Because the business case is so clear and transformational, there’s less need ROI analysis because of course the business needs ERP. It then becomes more about selecting the specific vendor solution that makes financial sense, not whether ERP is worth it overall. This reduces the need for talk of ROI.
- Calculating ROI is Hard Due to the Scale of Change
A second and related reason we’re not talking about the ROI from ERP systems more is because this number is hard to calculate. Generating an accurate number on the value of ERP to a business is hard since ERP impacts all parts of the business.
ERP isn’t niche software that helps only one area of a business, such as accounting. With specialty software, it is a lot easier to make a clear business case. But when the software touches all parts of a business, meaningful numbers become much harder.
So since business leaders already clearly see that ERP makes sense, and proving it with ROI analysis isn’t a simple process, many times businesses just move straight to picking an ERP.
Even vendors and third-party consultants such as Navigator Business Solutions avoid the topic because it is hard to talk about the value of ERP in general terms since what it will achieve for each business is as different as the business using the software.
- Non-ERP Software May be Mislabeled
Businesses may implement software which is referred to as ERP, even though it offers just a small portion of the capabilities it should. For example, accounting tools or CRM platforms may be labeled as ERP systems by users, creating confusion as to what constitutes ERP.
The ROI of accounting or CRM software would be different to that of ERP, which means business users may not be discussing the value of ERP even when they think they are. Scouring content written by these users would leave readers struggling to find reliable, accurate information on the ROI they could expect to generate in the future.
So this further muddies the water.
Calculating the ROI for ERP
So what should be said about ROI when it comes to ERP?
As mentioned above, calculating ROI for ERP typically is a very business-specific discussion. But when calculating ROI, the typical costs associated with ERP and the main factors that lead to a faster ROI deserve discussion.
Costs Typically Associated with Cloud ERP
There are principally two types of ERP today: On-premise and cloud-based ERP.
When calculating the true cost of on-premise ERP, there’s of course the software licensing costs. But the greater costs for on-premise ERP often are much greater factors. These include:
- Customization and Implementation costs
- Hardware costs
- IT personnel costs to support the system
- Maintenance costs
- Training costs
Calculating the costs of cloud-based ERP are a much simpler proposition, however, since cloud solutions simplify software implementation and overall maintenance quite a bit.
For cloud-based ERP, businesses will first need to look at the obvious cost of the subscription fee for the cloud ERP. After that, the primary costs are:
- Implementation costs
- Customization costs
- Training cost
All three of these can be significantly reduced with cloud ERP, though. Implementation costs can be reduced by choosing a prepackaged industry solution that is already set up for the company’s line of business. Customization costs can be reduced or eliminated if a business has the discipline to lean on standard processes instead of going custom (modern cloud ERP doesn’t require the customization of older, on-premise systems—customers just think it does). Training costs can be partially handled by in-software tutorials and vendor-provided materials.
Factors that Affect ROI
When it comes to determining how fast an ERP solution will pay for itself, it is worth noting that there are three big factors that make a huge difference with the timeline.
- Quality of Current Business Processes and Software. If business processes have not been reviewed in years, an ERP implementation can open the door for dramatic gains in efficiency and optimization. Likewise, the move to a cloud-based ERP system brings faster ROI for businesses that need an IT systems refresh.
- Organizational Adoption. One of the most important factors in the ultimate success of an ERP system is how well a business onboards employees and drives adoption of the new system. Businesses will realize ROI faster if employees are fully using the system instead of working around it and leaning on other systems such as spreadsheets and homegrown or manual solutions.
- Implementation Team. A cloud-based ERP implementation that is managed competently, takes into account a company’s actual business processes and avoids common implementation pitfalls will significantly cut initial costs and deliver a solution that drives actual efficiency and competitive advantage for a business.
So while ERP almost self-evidently is worth the investment, looking at these costs and these three factors that impact the ROI timeline will help you calculate a reasonable ROI for your ERP investment.
Typically, businesses see a return on investment between two and four years after ERP implementation.
To learn more about the process of ERP implementation, and get a more specific handle on the ROI around ERP for your business, contact us at (801) 642-0123 or firstname.lastname@example.org.