Calculating ERP ROI and 5 Ways to Enhance Its Profitability!

Are you a business owner looking to streamline your business processes? If so, implementing ERP is the right choice!

ERP (Enterprise Resource Planning) is an integrated software intended to automate company business processes and help you see your business more broadly. In its implementation, you certainly want to gain profit (Return on Investment) from ERP implementation (ERP ROI).

Therefore, here is further explanation regarding ERP ROI, ERP ROI analysis, ERP ROI calculation, and tips to increase its profitability.

What is ERP ROI?

ROI or Return On Investment is a ratio used to measure the effectiveness of an investment. ROI is calculated by comparing the net profit earned with the amount of money invested. Investors usually use ROI to determine their next business strategy and develop new businesses.

Meanwhile, ERP ROI is the profit ratio given by ERP investment (expressed as a dollar value) against the total cost of ownership (TCO) or investment. ROI in ERP is expressed as a percentage.

Benefits of implementing ERP

Before calculating the ERP ROI, it is important to establish the reasons why your business is investing in ERP and what is expected to be achieved. Here are some benefits of the ERP system that can bring advantages to your business.

Tangible benefits can be easily measured. Some tangible benefits of ERP implementation are optimized inventory levels, reduced purchasing costs, and minimized days outstanding in accounts receivable.

In addition to tangible benefits, there are also intangible benefits that are difficult to measure such as business process efficiency and automation, reduced errors, improved customer service, faster and more accurate accounting practices, and better information and reporting. Both affect your ERP ROI in several ways and should be calculated when measuring the success of ERP implementation.

Calculating ERP ROI

ERP implementation has two main phases: initial installation and sustained use by employees to optimize the new technology. In the initial installation phase, companies often rely on ERP vendors to assist with implementation, which requires a lot of costs. In addition, this process also includes data migration from the previous system to the new ERP.

The second phase is sustained use supported by employee training and ease of use to maximize the ERP ROI. Many successful implementations focus on initial employee training to learn the ins and outs of their new system. The costs incurred in both phases become components that can be used for ERP ROI analysis.

Here is a formula for basic ERP ROI calculation:

ROI = (total investment value – total investment cost) / total investment cost x 100%

When calculating investment costs, there are several aspects that must be considered, namely license costs (on-premise ERP), subscription costs (ERP cloud), consulting costs, implementation costs, and hardware costs.

Tips for increasing ERP implementation profits

To maximize the ERP ROI, there are several tips you can apply as follows:

1. Prioritize training

To make the new ERP system profitable, employees must adopt new work processes and utilize software to the fullest. Employee training will increase the initial cost of implementing the new ERP system, but this investment will provide quick and long-term results by increasing ROI.

Employees who are not trained and encouraged to use the new ERP system tend to continue to use spreadsheets and manual processes, reducing the impact of this investment.

2. Do continuous evaluation

In order to maximize ERP ROI, it is important to continually evaluate and refine the approach being used. Business leaders are advised to evaluate the costs and returns on investment of ERP solutions at least once a year, compare it with baseline figures, and consider new ways to reduce costs and extract value from the system and data it provides.

Cloud-based ERPs like Impact allow businesses to set department and company-wide KPIs and track them closely to ensure they continue to improve their business performance.

3. Get support from top management

The success or failure of ERP implementation depends on the company’s vision and commitment to using the new solution. Every executive, department head, and manager should support and understand the important role of ERP in driving growth and success. This is the key to transformation and bringing employees together on the journey.

4. Be realistic about costs and benefits

Estimating the cost of implementing new technology is quite difficult, especially for small or medium-sized companies that are transitioning to more advanced ways of working. Many businesses seek help from ERP vendors or their implementation partners for guidance on timing, costs, and how to train employees effectively and efficiently.

It is also important to accurately measure the benefits of the new ERP to get a complete picture of ERP ROI, including tangible and intangible benefits.

5. Avoid common ERP implementation mistakes

Some common mistakes often hinder businesses from realizing the full potential of ERP systems. The most common mistake is treating ERP implementation like traditional technology implementation, with a single upfront cost and a short return on investment period. However, in reality, most successful ERP implementations are done gradually over time, with ERP ROI calculated at each milestone achievement.

Read also: Role of ERP in Digital Transformation

Conclusion

ERP is a solution for automating business processes to be more efficient and effective. ERP implementation is now widely used in various fields of business, ranging from manufacturing, retail, to food and beverage. However, in its implementation, ERP implementation often does not have a positive impact on the company’s ROI and tends to hinder it.

Therefore, special strategies are needed to increase ERP ROI and provide maximum benefits. To maximize ERP ROI, you can use Impact ERP, which provides free consultations with experts and integrates the entire company system to provide maximum benefits.