What is the Return on Investment?

By Rich Duncan

A key metric to consider for an ERP system is Return on Investment (ROI). This metric measures the financial benefits that the ERP system provides compared to the investment made. The ROI can be calculated by comparing the cost savings, increased revenue, and other benefits to the cost of the system.

ROI is an important metric to track because ERP systems are a significant investment for organizations, both in terms of time and money. An ERP system is designed to help an organization improve its business processes and increase efficiency, which can lead to cost savings and increased revenue. However, the benefits of an ERP system may take some time to materialize, so it is important to monitor the ROI over an extended period of time.

To calculate the ROI of an ERP system, the benefits and costs should be analyzed. The benefits of an ERP system may include:

  • Improved productivity: By automating manual processes and providing real-time access to data, an ERP system can help employees work more efficiently.
  • Reduced operational costs: An ERP system can help reduce costs by optimizing inventory levels, streamlining supply chain management, and minimizing waste.
  • Increased revenue: An ERP system can help increase revenue by improving order processing, enabling cross-selling and up-selling, and providing real-time visibility into customer data.

The costs of an ERP system may include:

  • Software licensing fees: The cost of purchasing the ERP software.
  • Hardware and infrastructure costs: The cost of servers, networking equipment, and other hardware required to run the ERP system.
  • Consulting fees: The cost of hiring consultants to help with the implementation, customization, and training.
  • Internal resource costs: The cost of dedicating internal resources to the implementation, including project management, IT staff, and end users who will be using the system.
  • Training costs: The cost of training end users on how to use the ERP system.

Once the benefits and costs have been identified, the ROI can be calculated using the following formula:

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ROI = (Total benefits – Total costs) / Total costs

For example, if an organization spends $500,000 on an ERP system and realizes $750,000 in benefits over a three-year period, the ROI would be calculated as:

ROI = ($750,000 – $500,000) / $500,000 = 0.5 or 50%

This means that for every dollar invested in the ERP system, the organization realized an additional 50 cents in benefits.

Tracking the ROI of an ERP system is important to ensure that the investment provides value to the organization. By carefully monitoring the benefits and costs over time, organizations can make informed decisions about their ERP system and identify areas for improvement.

Posted in ERP, Implementation, Upgrade

About Rich Duncan

Rich rock-starred his way through large corporations working for the likes of IBM and American Express. Starting out as a "simple" IT Desktop Support Technician he manuvered his way through the scenery learning role after role and eventually felt stuck as a Lead Programmer. Finding that unfulfilling he set out to become an entrepreneur and after building a successful worldwide brand he crossed back over into the professional world as an ERP and WMS consultant.

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