An ERP system will become the backbone of your company. Implementing one is a long-term project that affects your organization both internally and externally, so it’s essential to keep your reasons for doing it front and centre. Calculating ROI lets you properly measure financial risks and helps you bring even the most reluctant employees on board. In this article, we explain how to calculate the ROI of your ERP project.
ERP Project ROI: Key Elements to Consider
Return on investment (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 assessed in order to calculate it.
Costs: Based on the quotes and estimates your future partner provides, you can assess implementation costs right from the start (software acquisition, maintenance, integration, training, etc.).
- Increased revenue
- Reduced and controlled costs
- Increased productivity and agility
Duration: Your ERP project will not be profitable in the short term. However, you will need to determine a reasonable time frame to measure results.
For your ROI calculation to be accurate, you also need to know what to measure, how to measure it, and which indicators to track so that all stakeholders are aligned.
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.
ERP Project Failure: What It Can Cost You
In a 2015 Panorama Consulting Solutions survey, 21% of surveyed companies said their ERP project had been a failure. The failures can be numerous.
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 affect a company's productivity and the engagement and commitment of its employees. We cannot stress enough the importance of properly vetting your future partner and pre-evaluating the ROI of your ERP project, as well as any hidden costs it may generate.