How to Measure the ROI of ERP Implementation?

Marketing Team
Published on September 26, 2021

The goal of investing in a new ERP system is to lower operating costs, increase productivity, and improve process integration. The cornerstone for any standard ROI calculation is a ratio of probable financial gains to the amount of money spent. While calculating expenses is relatively straightforward, calculating gain requires consideration of aspects that are not immediately quantifiable. Several elements, such as the expected pay-back duration, are based on total figures that can be virtually wholly fictitious or on company goals that are susceptible to personal preferences. The most common method of calculating ROI estimations is to examine the purchase price and operating costs, followed by the computation of the resulting benefits. The inclusion of theoretical returns, in addition to the more visible gains due to efficiency and process enhancement, has traditionally made calculating the ROI for an ERP system difficult. There's a far easier approach to provide accurate cost estimates for ERP software and break the loop of overruns. The ERP ROI analysis begins with the definition of each element, the number of items that make up each element, and the cost per item. We've come up with four main cost calculations that are likely to influence the ERP software system you select to deploy after considering the various elements to consider:

Licensing Budget

The licensing budget should be kept flexible. Be prepared for unseen changes in the number of licenses that you might need. You might start off with a certain amount of license count but during and after ERP implementation that might change. For example, while implementing a new ERP solution you applied for a more restricted license as you considered users to access via sales terminal. But, as the business progresses, your users and operations also increase, and streamline your processes, you might have to start adding new management solutions, which demand a full license to access such modules. Some ERP packages provide basic capabilities for financial administration, inventory and project management, procurement, etc. This feature offers the fundamental application functionality needed to run certain operations, such as a general ledger, accounts payable, accounts receivable, and a stock level record, among others.

Determine Hardware Expense

Software licenses were once acquired, financed, and depreciated in the same way that hardware was. Subscription settings for Software-as-a-Service (SaaS) have drastically altered how ERP Software is purchased and utilized. If your ERP software is deployed on-premise, you are choosing the whole expense of setting up the infrastructure from acquiring new servers to networking equipment. You have to consider all additional expenses of acquisition, upgrade, and extra servers. Computer hardware is typically purchased, documented as an asset, and depreciated over the course of its useful life. In your ROI calculations, the greater depreciation in terms of decreased taxes or enhanced cash flow should be accounted for as a benefit (Return). However, if you choose a cloud-based ERP you get a more customizable, flexible, and more economical solution keeping your hardware expenses at minimal. Unlike SaaS and on-premise solutions, it is outsourced, reducing any maintenance cost. Clearly, the difference between an on-premise and a SaaS software purchase will have a big influence on your judgment. As a result, the option must be incorporated into your ERP project's ROI calculations.

Reduced Operating Expenses

Your new monthly operational expenditures post-go-live are a straightforward measure to identify when calculating your ROI. Operating costs might range from the cost of real estate and utilities for hosting physical servers to hourly rates and benefits pay for your employees. Your accounting department most likely has this data on hand and monitors it on a regular basis, but if you want a more in-depth knowledge of how an ERP system may save operational expenses, it's worth delving further. After you've calculated the costs for each of the three categories below, add them up to find your most recent operating cost. When you compare this figure to your previous system's running costs, you've obtained your first gauge for the ERP project's worth. In order to maintain—and capitalize—your ERP investment, your ROI analysis must include the cost of training new employees or retraining existing employees when software upgrades are implemented as continuing costs.

Streamlined Supply-Chain

When calculating the value of your ERP solution you should consider the reduced cost of goods. By using an allrounder ERP solution like Dynamics 365 you can streamline your supply chain and increase visibility at every step of the way. This way, you feel more prepared and empowered to handle the exact cost of goods, thus, reducing the chances of any sudden expenditure. The Microsoft Dynamics ERP Solution consists of five primary products - Microsoft Dynamics AX, Microsoft Dynamics GP, Microsoft Dynamics NAV, Microsoft Dynamics SL, and Microsoft Dynamics C5. This software helps companies combine manufacturing, supply chains, compliance, planning, and process optimization to create a more integrated and efficient operation. Accurate data collection is important to make informed supply chain decisions. Every aspect of the supply chain is subject to unpredictability, whether it's a difference in time travel or the number of orders. Keep room for such flexibility to optimize your ROI.