Calculating the ROI of ERP

Before companies embark on a project to implement ERP (enterprise resource planning) applications, they must develop a business case, which should include specific goals, the benefits and costs of a new implementation, as well as a calculation of the return on investment. That ROI assessment should take into account the costs of the implementation, including employee training, workplace disruption, and other operational roadblocks, relative to the benefits—particularly the financial ones—that the new applications will deliver.

It’s crucial that the business case circles back to achieving company goals. This is done by tying specific business changes to potential benefits so that everyone involved in the implementation—from executives to end users—can see or measure success. As well, it’s not enough to say that the company may save $800,000 by consolidating procurement processes. Someone must be held accountable for ensuring that business processes improve in tandem with system changes.

How to Calculate the ROI of ERP

Before implementing a new ERP system, companies need to uncover and quantify the potential value relative to the total costs. Seldom can companies do this type of discovery on their own. They need to tap consultants and/or the ERP vendors themselves, which bring industry and technology expertise; knowledge of different operational areas, such as finance, planning, and manufacturing; and experience with other, similar companies that have already gone down this path.

These experts meet with company leaders to determine implementation goals and scope, then lead “discovery workshops” with people throughout the organization. With that data in hand, they move into the analysis stage, benchmarking the efficiency and effectiveness of different functions and uncovering opportunities for cost savings, revenue growth, and risk mitigation. Lastly, they create a business case that lays out the larger company goals and identifies the operational obstacles that need to be overcome to enable digital transformation. The business case includes benefits, success criteria, and specific action plans—analysts can use that roadmap to calculate ROI. Employee training and application ease of use are essential to maximizing the ROI of a new ERP system.

For more specific elements of an ERP system ROI calculation, read on.

1. Assess your processes. Review your business processes and workflows to uncover ones that are slowing down or duplicating work—for example, finance workflows that involve manually entering data into systems or tedious IT processes necessitated by the use of outdated software. This is also a good time to look at opportunities to use AI to produce better business forecasts or adopt cloud-based finance software to free IT staff from system maintenance work so they can focus more on value-added activities.
2. Uncover the benefits associated with an improved ERP system. You need to estimate expected benefits over a specific timespan—five to ten years is typical. Some of these tangible benefits include a faster financial close, improved financial forecasts, reduced inventory (which will free up cash), and reduced labor costs through process automation.
3. Determine the cost of investment. Costs you’ll need to know to determine ROI include consulting fees, ongoing software subscription or software license fees, integration costs, implementation, training, and testing costs, and hardware costs. The cost of the investment varies from organization to organization, depending on number of users and whether your ERP system will handle one or more areas, such as accounts receivable and accounts payable, or will extend into financial planning, inventory management, manufacturing, procurement, and other areas.

ERP ROI Formula

The ERP ROI formula is simple, but getting the numbers needed to achieve an accurate calculation can be difficult. There are two main junctures in implementing ERP: the initial purchase and installation phase and the ongoing use of the system, which involves an array of factors, such as training and familiarizing employees with the features and benefits and refining the output of analytics tools so company leaders are getting the real-time, accurate information they need to make better decisions.

The basic formula for calculating ROI is as follows:

ROI = (total value of investment — total cost of investment) / total cost of investment x 100

The first step is calculating the total cost of investment or total cost of ownership (TCO), which you can obtain with this formula:

TCO = purchase price + implementation costs + operating costs for a span of years (often five to 10 years)

In plain terms, ERP ROI is the ratio of the gains that result from an ERP investment (indicated in dollars) to the TCO. That ratio is expressed as a percentage. The TCO encompasses the upfront costs of the system and the costs that accrue over time, which with a cloud-based system would be subscription fees over the life of the system. The higher the ratio of gains to TCO, the better the ROI.

Key Takeaways

• Calculating the ROI of your ERP investment is a complex task, but without those numbers, company execs may not understand the urgency of upgrading, and staff won’t necessarily buy into the workflow and process changes that need to take place.
• Cloud-based ERP systems cost less to implement and maintain than on-premises systems, giving companies immediate benefits while spreading out the system costs over time.
• Many ERP system upgrades extend beyond a company’s finance capabilities to procurement, inventory management, project management, and even manufacturing.

ERP Benefits to Businesses

Like remodeling a house, upgrading an ERP system can seem like a scary proposition. But failing to do so can mean giving ground away to competitors that are running more efficiently and making more-informed financial and other decisions, sometimes in real time, based on data gathered from across the entire organization. Read on to learn more about the benefits that can accrue from a modern ERP system.

• Gain more flexibility. Modern, cloud-based ERP systems are modular, so companies can deploy the components they need when they need them rather than in one big bang implementation. For example, companies can implement a cloud ERP system’s accounting hub, accounts payable, accounts receivable, expense management, and other financial modules while leaving procurement, project management, and other system capabilities for later.
• Simplify and streamline accounting and reduce errors. Automating mundane, repetitive tasks, such as data entry, helps finance teams speed the financial close process, cut costs, and free individuals to spend more of their time on higher-value activities. Most accounting errors are human errors, and this is where the true value of automated finance systems emerges. Finance software with high levels of automation and systems integration will minimize the need for manual intervention, thus minimizing error occurrence.
• Gain access to financial data in real time. When finance data is consolidated into a single database, companies can get a complete and current view of financial performance, including costs, revenue, and profitability. Based on preset analytics, finance teams can track important key performance indicators (KPIs) in real time, such as inventory turnover, profit margins, and working capital. Teams will spend less time reconciling accounts and more time working on projects that add value to the organization.
• Reduce operational and inventory costs. By connecting inventory management with other enterprise operations, such as financial planning and demand forecasting, companies can get a better handle on stock levels. New ERP systems can even automatically order new items when needed, or alert purchasing managers. Optimizing stock levels can reduce operating costs by ensuring that companies avoid having too little stock on hand, thus reducing the opportunity costs of missed revenues, or too much stock, which can result in higher waste and storage costs. By providing better visibility into supplier rates and performance, modern ERP systems also help managers negotiate better prices and delivery times.
• Consolidate procurement. Companies that know how much they’re spending on, say, office supplies can use that knowledge to consolidate purchases with a handful of suppliers and negotiate discounts. If employees have a single, easy-to-use procurement portal that sends them to those suppliers and automates approvals, companies can save money and create a single source of data to track these expenditures.
• Scale to meet the needs of a growing company. Growing companies need an ERP system that can easily scale to support increasing transaction volumes, as well as periodic surges and declines in activity.

Tangible vs. Intangible Returns on ERP Investment

“Hard” ERP benefits are those that can be easily quantified—that is, associated with a measurable value, whether it’s lower costs or improved response times to customer queries. Examples include reduced labor costs, higher productivity, and improved customer response times.

“Soft” or intangible returns are more difficult to measure. These include improvements in employee morale and better employee retention (to the extent that modern ERP systems are easy to use and remove mind-numbing manual processes). They also include improved brand equity with customers, which can result from providing customers with more options and better service—for example, through a more streamlined ordering process and the ability for customers to better track the location of their shipments. While the intangible benefits may be difficult to calculate, it’s worth presenting them to decision-makers as part of the formal business case for a new ERP system.

How to Improve the ROI of ERP

Companies embark on ERP upgrades for a variety of reasons, but mostly to take advantage of the cloud’s many benefits, including its subscription payment model, the regular feature updates, its security and scalability advantages, and the fact that cloud vendors handle all system maintenance. Here are the steps companies can take to assess the ROI of their ERP systems and determine whether an upgrade is in order.

1. Track KPIs related to the implementation. Those can include business metrics, such as the reliability of financial forecasts, the margins on projects managed with the ERP system, inventory turnover levels, and productivity, as well as assessments of the applications themselves, such as their data reporting and analytics features, application usability, and system performance.
2. Map out ERP-managed business processes. Business process maps are visual representations of the steps taken to perform a process from beginning to end. They’re essential to uncovering the tasks and operations that are manual and the opportunities for automation and other types of improved efficiency.
3. Identify performance gaps and improvement opportunities. A gap or needs analysis compares an organization’s present and target states. With regard to assessing the ROI of ERP systems, the current software may require employees to enter redundant information into siloed systems, while a new, connected ERP system would eliminate that redundancy and thereby that gap. Older systems may not have the robust security needed to defend against today’s cyberattacks. Failing to close that gap can put a company and its customers at risk.
4. Quantify potential hard and soft benefits and cost savings. By measuring your current IT spend on ERP, including maintenance, support, security, upgrades, and integration, you can quantify the hard benefits of cost savings. Those costs include software and hardware, disaster recovery, and physical data center space. Headcount costs can include the finance people still handling manual processes, as well as the IT people (and consultants) responsible for managing, maintaining, integrating, securing, and upgrading the legacy ERP applications and their underlying hardware. Soft benefits aren’t as easy to measure but are nonetheless real. They include the ability to attract high-quality employees who want to work with the latest software and improved customer relations by providing accurate, current information about order status.

Get Started on Your Oracle ERP Implementation

When you start the ERP implementation process with a clear understanding of the ROI you can achieve, you’ll be better able to gain support throughout the organization, put the change management processes in place that will increase people’s comfort level with the new system, and make more informed decisions about resource allocation. Companies moving to Oracle Fusion Cloud Enterprise Resource Planning (ERP) get the benefit of state-of-the-art financial, manufacturing, procurement, and other functionality in applications running on Oracle’s scalable, high performance cloud infrastructure. Oracle Cloud ERP is an integrated suite of applications, complemented by Oracle Fusion Data Intelligence, which brings together business data, ready-to-use data analytics, and prebuilt AI and machine learning models to deliver deeper insights and accelerate decision-making.

ROI of ERP FAQs

What is the success rate of ERP?
According to a 2023 report from Panorama Consulting Group, 83% of organizations that had performed a pre-implementation ROI analysis and were live for more than a year said their ERP projects provided the ROI they expected.

How can we get the best ROI for our ERP implementation?
Fully integrated cloud-based systems are key to getting the best ROI from your ERP implementation, given their features, scalability, security, cost, and other advantages.

Why is it difficult to calculate ERP ROI?
Calculating the ROI of an ERP investment is difficult because the potential returns are both intangible and tangible and because not all companies have the ability to document challenges and quantify benefits.

Is ERP software a good investment?
ERP software is considered one of the most important IT investments given the importance of the financial, manufacturing, project management, procurement, and other processes it helps manage and improve.