How to Calculate ERP Return on Investment (ROI) for Your Business?

Suppose you’ve decided to implement an ERP solution for your business and plan to take it to the next level, it is evident that investing an extensive amount of money in ERP is not a cakewalk, as it requires to justify the budget and the expenditure.
But how will you calculate the budget required for an ERP system? Nowadays, most CFOs will want the ERP committee to justify the budget allocated to an ERP project by showing the Return On Investment(ROI).
For doing so, there are two components required:
What will the ERP project cost?
What are the savings, efficiencies and goodwill from the project?
A quote from ERP Focus says, “If you cannot reasonably predict earnings from your ERP that sufficiently outweigh your system costs, you should probably look for another place to spend your money.”
Let’s start digging deeper into these concepts.
Table of Contents
How to Calculate the Investment for Implementing an ERP System?
Is the ERP Solution Worth the Investment?
What Are The Tangible & Intangible Benefits?
The ROI Equation
ERP ROI Calculation In The Past
How to Calculate the Investment for Implementing an ERP System?
For calculating the investment of an ERP system, there are a few components to be considered. It is always better to have a five-year budget that covers the initial investment and the Total Cost of Ownership (TCO) over the same period. The total cost of license, implementation, training, and maintenance cost of the software, all put together will give the TCO.
Let’s detail the necessary components:
• Cost of Software
There are two deployment models in an ERP system, for which the pricing structure is different. They are the On-premise ERP and cloud-based ERP.
On-Premise ERP: The on-premise ERP are hosted on the company’s servers and purchased via a hefty, one-off license fee. While you use this model, you need to update your hardware so that the ERP can run on it.
Cloud ERP: The ERP software hosted on third-party servers and accessed through the internet is the cloud ERP. The pricing system of these ERPs follows the per-user-per-month model. There is no need to update your hardware, but as long as you use the system, you need to pay the monthly user fees.
• Software Upgrade Investment
Every software needs at least one primary system upgrade every year. So, it is necessary to evaluate the cost of the upgrade. These costs mainly depend on whether or not the ERP solution is on-premise or cloud-based.
The pricing for on-premise is based on the size of business or the number of users required. Hence, these ERP systems require significant investment upfront and annual maintenance, including upgrade costs.
The cloud software pricing is based on an annual or monthly subscription. The cloud-based ERP software upgrades and enhancements are released on an ongoing basis, with costs baked into the subscription.
• Consultancy Investment
It is necessary to invest in consultancy to ease the upgrade implementation, user acceptance testing, training users in new functionality and support. Doing so will also enhance your ROI. The consultancy costs also depend on whether the software is on-premise or cloud-based.
The consultancy costs for on-premise software are higher, as the consultant should visit your premises to train your staff. It incurs more investment because of things like travel, consultant fees and more hours invested in arranging training. While in cloud-based software, all of the resources are online-based.
• Initial Implementation Cost
There are multiple methods to implement an ERP solution. The methodology you choose will provide you with the implementation budget. The costs include but are not limited to:
Software installation
System blueprint documentation
System Configuration
Reporting Configuration
User Training
Admin training
Data conversion (test and live integration)
User acceptance testing
Pre Go-live preparation
Go live
The post-Go-live support
Month-end support
• Investment on the Internal Staff
The ERP implementation also requires some support from the internal team members. The team members are necessary for:
User acceptance testing
Extracting data from legacy systems
Attend user training
Attend project meetings
Help with functional requirements
The costs mentioned above are some typical project costs that should be considered while implementing the ERP software. We recommend you to carefully quantify these costs before investing, as they help you accurately weigh ERP business benefits and costs.
After evaluating the total investment required for implementing an ERP system, it is now time to focus on the Return On Investment (ROI) of the ERP.