Calculating ERP ROI: A Condensed Guide
Choosing the right ERP solution for your retail business can enable incredible growth through improved operations and processes. However, selecting the right solution isn’t always the easiest of tasks - especially with the rising number of options available on the market today. One major way that can help you to ensure the viability of your investment is by understanding how to calculate ERP ROI - which is what we’re looking at today.
To begin, consider your simple ROI = (expected return – expected cost) / expected cost
The resulting quotient, as expressed in a percentage is your ROI. A larger number signifies a better investment - but this can be a difficult number to arrive at accurately because of the challenges associated with measuring costs and revenue streams across different departments; plus, temporal factors.
To find your expected costs, there are a few factors to consider:
- Licensing fees and related upgrades: Will your ERP solution be on-premise or in the cloud? If you’re choosing an on-premise option, will you need to upgrade your hardware? If you’re in the cloud, while you probably won’t need to make major physical upgrades, you’ll still generally be operating in an SaaS model, so the fees will be ongoing.
- Maintenance costs: This can mean support, upgrades and other ongoing costs necessary to ensure the smooth functioning of your solution within your retail business. In a cloud option, your maintenance is often included as part of your licensing fees, whereas with an on-premise solution, your maintenance may be carried out by your own internal IT team or by the 3rd party that helped you to implement the platform.
- Implementation costs: Chances are, you’ll need some help from specialized consultants when you’re transitioning - especially when it comes to major tasks such as data migration or customization. This can also include training on the platform for your employees, so it shouldn’t be underestimated as an important expense. Your implementation team should not only be experienced in your chosen product, but also in your industry - which can help to minimize the risk of error and lower your initial and ongoing costs.
Next, you’ll need to find your expected return. The factors that helped you to decide that you had a need for an ERP solution will be where you assign returns. For example, if having better visibility into your supply chain can enable your products to arrive in store faster, what is this improvement worth? Returns can come in the form of increased revenue or in decreased costs, so be prepared to come across returns you never expected to find.
With all of this information now readily available, it will be key to build a team to better analyze your data and turn it into usable insights. These team members should come from every department of your business as their individual perspectives can help to give a deeper and more balanced understanding. Including financial analysts in this process can help with the coordination of all estimated costs and returns and give you an objective opinion on your ERP solution and how it compares to other options for investment.
Once your team is in place, you have all the data you need, and everyone agrees that it is accurate and acceptable, it’s time to carry out your analysis. It is important to keep in mind throughout your analysis the impact of factors such as risk and time that are more difficult to measure. If your final number and outlook is positive, then it’s time to take the next steps; if it’s negative, there may be another solution that is better suited to your needs.
If you’re interested in learning more about how ERP solutions can improve your entire retail business and its operations, make sure to download our ebook
Disclaimer: The views expressed here are solely those of the author in his private capacity and do not in any way represent the views of Systems Limited, or any other entity related to Systems Limited.