A Better Way to Calculate ERP ROI

Trying to determine the exact Return on Investment (ROI) of an Enterprise Resource Planning (ERP) project is often considered a waste of time because the benefits are largely intangible, hidden, or delayed, making traditional, precise financial formulas ineffective. Because ERP systems are foundational transformations rather than niche software, calculating a precise ROI is difficult, time-consuming, and often results in inaccurate projections. 

Here is why we tend to view the exercise of calculating ERP ROI to be a waste of time:

• Intangible Benefits are Hard to Quantify: The biggest gains from ERP, such as improved decision-making quality, supporting functionality that was previously performed manually, higher employee morale, improved customer satisfaction, and data visibility from one source of truth, are difficult to translate into a specific dollar amount.

• Benefits are Hidden or Interconnected: ERP impacts all areas of a business, making it difficult to isolate the savings specifically attributable to the software versus other operational improvements that may have previously been performed manually or not at all.

• Results aren’t Achieved in a Day: Most new ERP implementations require significant post-go-live "clean up", user acclamation to the new system, and the introduction of new processes and procedures.  This contributes to a false positive ROI that is tied to optimistic short term results, rendering immediate ROI projections meaningless.

• The "Self-Evident" Value Myth: Many argue that the business case for ERP (better visibility, new integrations, new functionality to support improved efficiency) is already clear, making detailed ROI analysis an unnecessary bureaucratic step.  Many ERP ROI exercises tend to start with the concluding dollar value justification number and the effort then works backward to achieve the desired results.

• Focus on Inaccurate Metrics: Traditional ROI calculations often fail by using ideal scenarios, ignoring real-world complexities like high customization, budget overruns, and steep training curves, leading to flawed projections. 

  
  

A Better Approaches: Benefits Realization with Stakeholder Commitments

While many executives view return on investment (ROI) as a necessary hurdle, some argue that obsessing over it to justify an Enterprise Resource Planning (ERP) project is a waste of time because the benefits cannot be captured by a simple formula. 

Instead of a standard ROI model, an ERP should be seen as a strategic transformation that shifts how a business functions. 

Instead of focusing on a singular, elusive ROI percentage, we find that moving toward a process of identifying potential benefits and tracking the realization of those benefits is a better approach. This involves identifying specific, tangible, and intangible, operational "pain points" rather than attempting to calculate a total corporate ROI. 

Engage key business stakeholders to identify departmental or personal goals as to how they perceive the new system will impact their workday and have them categorize them as intangible “soft” benefits such as:

• Improved Decision-Making: Real-time data visibility allows leaders to act faster.

• Risk Mitigation: Modern systems provide better security against cyberattacks compared to legacy software.

• Employee Morale: Reducing "mind-numbing" manual data entry can improve retention and attract higher-quality talent.

  
  

Versus more measurable metrics such as:

• Reduced Cycle Times: How much faster are you closing monthly financials and fulfilling orders

• Carrying More Current AR Balances: Do you have greater visibility to customer receivables and are you able to collect on those receivables in a more timely manner?

• Improved Inventory Accuracy: Are you carrying less safety stock due to better visibility?

• One Version of the Truth:  Are decisions being made based on a "single version of the truth" 

  
  

In the process of identifying measurable metrics, inform the Stakeholder that they will periodically be asked to revisit their declared metrics and be held accountable for achieving them.  In some instances the ERP system itself can reflect these metrics on a dashboard for all to see.

We have a Better Way! Rubenstein / Justman Management Consultants (RJMC) prides itself on managing ERP implementations to show practical and tactical results both in the short-term and the longer-term. Don’t delude yourself with a positive ERP ROI model.  The decision to change a system or upgrade an existing system is usually apparent without an ROI exercise.  More importantly, a successful ERP implementation requires an engaged and experienced project management team to realize project success.  Engaging with RJMC is the best way to achieve your desired ROI!