Do you need an ERP? Calculate your ERP Return on Investment to find out

Step 1: Identify your goal

A lot of ERP implementations fail because the goal of implementing an ERP is unclear. Most of the companies we talk to just want to “upgrade from their current systems.”

Ideally, business leaders should know what it is that prevents them from growing their companies through data and having discussions with their customers, employees, and suppliers. 

By doing so, they will know what it is they should start doing, stop doing, and continue doing. And it will be clearer for them to see how an ERP software can help them achieve their goals.

Step 2: Quantify your expected benefits

Once you know how an ERP software can help you achieve your goals, you can quantify those benefits (even if it’s just a rough estimate).

Some examples would be:

• Reduce inventory lead times from 8 hours to 2 hours
• Reduce production cost by 50%
• Increase sales conversion by 20%
• Reduce employee cost by 20%

Click here to download a Google Sheet template to estimate your operational cost savings from getting an ERP system.

Step 3: Quantify ERP costs

Once you know what your goal is, you will know exactly what features you need and what you don’t. When you speak with ERP implementers, they would then be able to provide a more accurate cost estimate.

Generally, ERP costs include:

1. Monthly license/subscription fee (mostly based on number of users)
2. Implementation fee (usually ranging from $20,000 to $1,000,000)
3. Customization fee (depending on the man hours and rate per hour provided by your implementer)
4. Server/maintenance fee (usually ranging from 17-23% of total project value annually)

We often find companies who want everything and they end up having to pay more than what they need. Eventually, they don’t use the features they requested. Don’t waste your money.

Step 4: Calculate your ERP Return on Investment & Break Even Point

You are getting an ERP because you want your company to be more profitable. Therefore it is important for you to know your rate of return from investing in an ERP software and when you are going to break even.

Although there is no rule to this, we generally think that if your break-even point is less than 2-3 years, you should get an ERP software.