How To Determine the ROI of Your ERP System

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Are you looking out for an Enterprise Resource Planning (ERP) system for your organization? It is always advisable to do a cost-benefit analysis before investing in an ERP system that takes your business to the next level.

How To Determine the ROI of Your ERP System

Before selecting and implementing an ERP system for your company, it is important to consider the benefits and returns you can expect. The selection of the right system with ERP features that suits your needs will determine the future success of your business.

How Can You Measure the ROI of Your ERP System?

Return on Investment (ROI) is the amount of money a company can earn back after investing in a project or software. ROI is also used to measure performance by comparing the returns of different investments by an organization.

To calculate the ROI for an ERP system, it is essential to calculate the total cost of ownership (TCO) in the investment.

The total cost of investment is calculated for a specified number of years. It involves various factors like license fees of the product, the amount spent in the installment of the product, and the hardware used for the software or product.

Additional costs will include maintenance of the software by a third party or an in-house team.

ROI is calculated by adding the monetary returns expected from the ERP system and dividing the amount by the TCO of ERP.

Factors To Consider While Determining the ROI of Your ERP System

Determining the ROI of your ERP system depends on various factors. Some can be easily measured and analyzed, while others are unpredictable and can change according to market trends. Here, they are:

Calculate and Compare ERP Costs

Choosing a solution with the best ERP features is a daunting task. It also needs a huge amount of money for the installation. ERP systems may be deployed on the cloud or on-premise.

If you deploy your ERP system on-premise, it will be hosted on your server. You might incur additional costs to update the existing hardware to suit this system.

Cloud ERPs are hosted on third-party servers and are accessed over the internet. If you plan to outsource your ERP solution from a vendor, you might need to pay additional monthly, quarterly, or yearly licensing fees.

Some vendors also charge consultancy costs for timely checks and updates. You need to factor them into the total cost of ownership.

It is important to calculate the subscription service charges and compare different vendors to select the best ERP solution for your organization.

Maintenance and User Training Costs

The ERP software comes with help desk support features and an installation guide. Vendors also include annual maintenance fees as part of the contract. Make sure to calculate the overall costs you might incur throughout the expected life of the ERP system.

After an ERP system is implemented, employees need to be trained for the optimal use of the software until they get acquainted with the ERP features.

It is an important part of calculating ROI for your ERP system. You might need to shell out more money to train the users for extra time.

There might also be temporary glitches in the product lifecycle management until the employees undergo thorough training. That incurs additional repair costs or downtimes.

Proper Organization of Inventory

An ERP system generates a vast amount of data across hundreds of spreadsheets. The maximum ROI on your ERP system lies in properly analyzing the data among different departments in an organization.

ERP vendors should provide a cost-effective system that can be used by all the departments efficiently. It will determine the ROI of the ERP based on the money spent in organizational change management.

Every team should get access to accurate data at any given point in time.

Analyze the ROI with the Finance Department

Your company’s finance department will play a vital role in analyzing the cost and returns involved in implementing an ERP system. Financial analysts can coordinate with the other departments in the organization.

Every employee should have a say in this matter for overall organizational benefits. It can help them compare the pros and cons of the project. The ROI on the ERP system can be accurately calculated by considering these factors.

A good amount of time should be spent on analyzing and calculating the ROI for your ERP system. It helps in a deeper understanding of the needs of your organization.

Conclusion

An inconsistent choice of ERP system will cause irreversible damage to your organization.

A proper calculation of the risk factors involved in implementing an ERP system will ensure potential benefits and maximum returns.

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