It is prudent for companies to measure the ROI of every long term investment for evaluating software performance yet, many organizations fail to understand the right way of calculating their return on ERP investment. This is because they overlook the importance of evaluating and documenting their objectives of implementing and ERP before the rollout. Although subjective in nature, this evaluation and documentation serve as a base for calculating ROI in the longer run. Therefore, in order to successfully measure the ROI, it is important for companies to follow certain steps and procedures.

To begin with, start assigning value and timelines to each of your objectives to be able to calculate Net Revenue after its implementation. For instance, 30% reduction in raw material wastage or 40% reduction in over-stocking. This will help you quantify the ROI at a later stage by subtracting the acquisition costs from benefits and then dividing it by the cost of acquisition (training cost, new manpower requirement, man hours required, implementation time etc).

Numerically expressed, ROI= Net Benefits (Benefits - Cost of Investment) / Cost of Investment

Here is a list of benefits and costs to consider for calculating the ROI of your existing or new system.

Benefits to consider:

1. Costs Reduction: Quantify the reduction in cost that you would expect after implementation of an ERP such as waste of raw materials, labour costs, errors, failures and rework. For instance, a company expects a 25% decrease in wastage of raw material or 10% decrease in labour cost after 1 year of ERP implementation. This will give you a number to refer to for evaluating actual performance while calculating the actual ROI of your ERP system.

2. Improvement in Productivity: Evaluate the percentage of time your departments spend in routine operations such as coordination, communication, documentation etc. Then attach a percentage to it that you would like to reduce to through automation. For instance, lets say your production department spends 20% of their time in such routine activities and you would like to bring it down to 5% after one year of ERP implementation.

3. Time-to-market: As your operations become more efficient in terms of coordination, communication, production etc, your time to market will reduce eventually in terms of delivery of products. In order to calculate the effectiveness of your ERP system, document the current time to market and apply a target to the same.

4. Efficiency: Analyze the current overstock & understock levels and the damages that occurred due to the same. Determine the percentage value of inventory optimization that you would like to achieve from the ERP implementation. A good ERP system can increase your optimum inventory levels to 90% or more.

5. Information security: Unsecured data on premise or cloud can cause huge losses to your organization as it’s not free from threats like theft, fire, malware etc. Implementing an ERP will prevent loss of data and fraud through integration of information. Consider the worth of your business data and the losses it may cause you due to these threats and why it might be a good idea to protect it with an in house system.

6. Competitiveness: Automation of routine tasks will allow you to focus on the quality of your products or producing the same product in larger quantities for gaining the competitive edge. Document the current production capacity of your manufacturing unit, wastage of raw material and time required to produce 1000 units of a particular product. You can then calculate the improvement after a period of time in terms of defined parameters.

Cost of investment to consider:

1. Initial costs: This would include the cost of acquisition of the ERP software such as one time license cost or the monthly cost in case of cloud option, implementation fee and the cost for support. Your cost may differ on grounds of the number of manufacturing units of your business as well. You should also add up the additional cost of hiring trained manpower for operating the system if required.

2. Consultancy costs: For ensuring absolute success of an ERP implementation, it is wise to include a consultant in the process who can guide according to their experience. A consultant will make sure that your vendor selection is most appropriate and implementation process is smooth.

3. Maintenance costs: In case of one time license fee, it is important to consider the recurring cost of AMC (Annual Maintenance Charges) along with other costs such as upgrade costs, costs of additional reporting format, cost of additional modules which you may need at a later stage etc.

4. User costs: Consider the no. of end users of the software and the pricing model of each vendor. Most of the popular software providers in the market will charge you on the basis of users which can increase your cost as your company grows in size & structure in the future. It is always recommended to opt for an ERP solution that gives you unlimited user license to suit your ever changing needs.

About Eazy ERP: India’s 1st Tally integrated ERP that has helped more than 250+ customers achieve it’s various KPI’s through comprehensive benefits at an economical price. Its ability to synchronize with Tally allows businesses to share data seamlessly between the two systems without the need to disrupt the finance department.

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