ERP ROI: Calculating the benefits of implementing an ERP

What are the main benefits when calculating the ERP ROI

Among the initial considerations when deciding to implement an ERP, NaN-tic recommends making an action plan that includes a forecast of the expected costs and the objectives to be achieved. This means marking what are the ERP benefits we want to achieve and what metrics we will use to measure their achievement.

The fact of establishing which metrics we will use to measure the ERP benefits that we pursue, on the one hand, will help us to know if our objectives are probable, but also, we will immediately see what benefits are tangible and measurable, and what benefits are intangible and complex to measure.

However, it is essential to carry out this planning, since consulting experience shows us that companies that work based on measurable objectives achieve higher performance of actions. In this way, we will achieve greater ERP performance, in addition to obtaining useful data for measuring the ERP ROI.

What are the difficulties of calculating the ERP ROI

The biggest difficulty when it comes to getting ROI from ERP is that many of the benefits are based on intangible metrics.

But also, in addition, an added difficulty is concerning costs. We have two types of costs to measure: the new and exclusive ones of the investment in the ERP; and the costs that are fixed in the company (whether ERP is implemented or not).

The first costs are of the type the payment of the licenses, for example; and the second type is the work that goes into implementing the ERP that is added to the regular work that employees already have.

Later we will see a very careful example of how we can get ROP ERP. But let’s start with the best of the news. Implementing ERP will have a positive impact on your company's productivity, and here's how.

The main benefit of implementing an ERP is...

ERP will lead to strategic production planning and increased productivity

The objective of production planning is to optimize productivity. To do this, measures are implemented to avoid waste and unnecessary expenses.

To achieve an optimized production, you will have to foresee all the stages of the process and, later, turn it into more agile and effective actions, positively impacting all corporate actors and, therefore, in profits.

In this regard, the implementation of an ERP with an initial deep consulting work will contribute:

—optimization of processes, —automation of procedures, —management of data that will facilitate planning and strategy in purchases and sales, —reduction of employees working time in repetitive tasks, —increase of tasks of greater corporate value, —better reliability and data security, —and, therefore, all this ends up to increased productivity.

Process optimization instead of obsolete bureaucracy

In companies, it is common creating processes to solve a specific need or solve a specific problem. However, after establishing a protocol, some become obsolete. To maintain the good results of your company, you need to avoid that these processes becoming empty bureaucracy that ends up in a folder inside a drawer.

For this reason, it is essential to evaluate each internal process by adapting it to the current metrics and objectives of the organization. In this sense, it is recommended that you:

—eliminate superfluous processes, —seek to improve effective activities —check them periodically to watch their performance.

In this way, you mitigate the probability of keeping obsolete processes active, which affect productivity and negatively affect profits.

How an ERP helps me to achieve the objective of optimized productivity

Business management requires flexibility, agility, attention, and decision-making capacity. That's why it's essential that you have the resources to manage unified data and global and individual tasks. It is very complex, isn’t it? Fortunately, technological advances have made the company's management work easier, promoting precision and proper development of daily tasks.

In this sense, ERP is the software that supports the business management system. In addition to becoming a powerful tool when it comes to internal tasks, it also enables better planning and strategy, and greater cohesion between departments. Ultimately, all of these benefits result in stronger, solid competitiveness.

ERP benefits versus costs

Here we begin with the task of calculating the ERP ROI. In order to measure it, we will need to have in advance the Key Performance Indicators (KPIs) allow us to analyze the important metrics for the business. Having them collected before the implementation of the ERP will allow them to be compared a posteriori at different stages of the amortization of the ERP. Through these indicators, the strong points of the strategy can be identified, as well as making it possible to understand what aspects need to be improved to achieve the expected results.

Tangible benefits (with clear KPIs)

1. Cost reduction:
   1. Reduction of hours per person
   2. Hours reduction per product
2. Data accuracy:
   1. Less wasted materials
   2. Less waste
   3. Less unknown losses

Intangible benefits

1. Increased security reliability
2. Greater Transparency
3. Better customer service
   1. Fewer complaints
   2. Greater loyalty

New and exclusive ERP costs

1. Software license (not in the case of an open-source ERP like Tryton)
2. Licenses per user (the same, in the open-source ERP Tryton that implements NaN-tic, users are unlimited without license costs)
3. Consultancy
4. Infrastructures
5. Maintenance
6. Incidents

Costs added to the existing

1. Hours per person dedicated to the project (Financial Directors, production, sales, etc.)
2. Hours per person dedicated to training software learning

Calculate the Return on Investment of an ERP

With all these indicators you will be able to keep track, not only of the ROI of the ERP but of the initial strategy that you set for the implementation of the ERP. In other words, the achievement of the objectives you pursue. Although you should be aware that you must mark a return on investment time of between one and a half and two years.

The financial formula to calculate ROI is:

ROI = (Profit - Investment) / Investment

A negative ROI will mean that the investment has not been recovered in the expected time.

An ROI equal to zero will mean that the investment has been recovered in the expected time.

A positive ROI will mean that the amortization has been exceeded and its performance is higher than expected in the established time.

The new challenges for the company of the future are...

Digital transformation, sustainability, R+D+i, cultural transformation, diversity, and equality... Can you think of any more?

Without a doubt, all these challenges are easier to face with an ERP in place and an expert team of consultants and developers like NaN-tic by your side.