An ERP will become the main structure of your company. Implementing one is a long-term project that impacts your organization internally and externally, making it essential that you keep in mind the reasons why you are doing it. Calculating ROI allows you to properly measure financial risks and get even the most reluctant employees on board. In this article, we explain how to calculate the ROI of your ERP project.
ERP Project ROI: The Elements to Consider
The return on investment (or ROI) is the ratio between the benefits and the costs of the ERP over a given period of time. The following elements need to be evaluated in order to calculate it.
Costs: Thanks to the quotes and estimates your future partner will provide you, you can evaluate the costs of implementation from the start (software acquisition, maintenance, integration, training...).
- Increase in revenue
- Reduce and control costs
- Increase productivity and agility
The Duration: Your ERP project will not be profitable in the short term. However, you will determine a reasonable timeframe to measure the results.
For your ROI calculation to be accurate, you will also need to know what and how to measure, as well as what indicators should be measured so that all parties involved are on the same page.
Calculate the TCO (Total Cost of Ownership)
Calculating the ROI of your ERP project goes hand in hand with calculating your TCO (total cost of ownership). It's not only a question of taking into account the cost of licensing and configuration but also evaluating the hidden (or indirect) costs. Here are a few examples of elements to consider:
- IT hardware and software costs, infrastructure and workstations
- Deployment and integration costs
- Power consumption
- Potential security risks
- Maintenance, training, updating and evolution costs
- Project management costs
- Costs in case of failure...
Evaluating TCO makes it easier to calculate ROI which is why we suggest objectively measuring the success of an IT project.
Let's look at MillerCoors as an example. In 2014, the company decided to deploy a global ERP for all its subsidiaries. In 2017, the project drifted severely off track. There were more than 47 failures and thousands of induced problems. The company decided to sue its ERP partner and sought roughly $100 million in compensation.
At Revlon, a deployment problem resulted in millions of dollars in lost sales and numerous malfunctions that sabotaged production at an entire site. These malfunctions incurred additional expenses, resulting in a loss of stock value and lawsuits from shareholders.
At Lidl, a decision was made to migrate the internal inventory management system to an ERP. However, after two years of project work and 500 million euros spent, the retailer decided to discontinue the project because the partner was unable to adapt the software to its needs.
These examples are taken from large companies, but these situations can also occur in SMEs.
The risks of a botched ERP deployment do not stop at a company's financials. ERP failure can also impact a company's productivity and the involvement and or the commitment of its employees. We cannot stress enough the importance of properly scouting your future partner and pre-evaluating the ROI of your ERP project as well as any hidden costs it may generate.