Measuring ROI in ERP Implementation

8th July 2019

With contemporary CFOs justifiably driving expenditure on the basis of measurable metrics, budget allocations for the deployment of an ERP system are subject to demonstrating Return on Investment (ROI). A proposed ERP implementation needs to be accompanied with an indication of its upfront cost as well as its payback period. While a cost benefit analysis is standard procedure for any business initiative, care must be taken to include both primary and secondary value that an effectively implemented ERP project will deliver. The cost of purchase, roll-out and maintenance are quite easy to ascertain, but the benefits derived can be a little less obvious. With both savings and an increased potential to earn profits being the key positive outcomes of such a deployment, benefits range from the clearly measurable to slightly less tangible metrics.

The most usual way of understanding ROI estimates involves considering the cost of purchase and operations costs and then the calculation of the benefits derived. Calculating the ROI for an ERP system, however, has always been complicated due to the inclusion of theoretical returns, apart from the more measurable benefits due to efficiency and process enhancement. Often, this has led to huge datasets across both internal and external variables, as well as a significant amount to conjecture about future values and the likely percentile of improvements made. However, guesstimates can neither guarantee that returns will be realized at all, nor demonstrate infallibly that a particular vendor’s solution is the best option to adopt. In recent years there has been an effort to take the guesswork out of the ERP decision. ROI calculators, based on studies and research, with tangible figures and actionable data have emerged that can guide informed business decisions.

The Basis of ROI Calculations, in the Context of ERP Systems

Investment in a new ERP system targets a reduction in operating costs, higher productivity, and better integrated processes. As with any standard ROI calculation, the basis is a ratio of likely financial gains to expenditure involved. While the calculation of expenses is fairly straight-forward, determining gain involves factors that are not immediately quantifiable. Several variables, such as the estimated pay-back period, are dependent on cumulative figures that can sometimes be almost entirely notional or based on business goals that are subject to preferences.

The Microsoft Dynamics for ERP solution is one such software that comprises of five primary products: Microsoft Dynamics AX, Microsoft Dynamics GP, Microsoft Dynamics NAV, Microsoft Dynamics SL and Microsoft Dynamics C5. These solutions assist businesses in integrating production, supply chains, compliance, planning and process optimization to deliver an integrated and optimal organization. Some of the more measurable benefits of a modern ERP solution include:

• Lowered material inputs due to coherent procurement, reduction in wastage and predictive control over foreseeable obsolescence.
• Streamlined inventory of ongoing production and finished goods, as well as curtailed labor costs due to improved allocation of tasks and reduced need for overtime.
• Minimized downtime, rework and resource shortages due to better scheduling, predictive analysis and improved coordination with supplier and sub-contractors.
• Reduced cost of after-sales service and redressing customer issues, due to improvements in quality and process reliability.

However, in addition to these more specifically measurable outcomes, several of the benefits of an effective ERP solution are secondary effects that can be more difficult to measure, such as:

• Efficiencies and process transparency due to the availability of integrated data, which also leads to a more empowered Management Information System (MIS).
• Reduction in errors and rework, improved customer service and reduction in the time taken from order to shipment.
• Effective accounting-derived optimization and regulatory compliance, due to more standardized procedures.

Developing Reliable and Actionable ROI Metrics for ERP Deployments

NASBA-accredited analysis firm from the United States, Nucleus Research, has collated results experienced by a diverse set of Microsoft customers to calculate ROI case studies across such deployments. Aggregated data in the Nucleus Research study included the outcomes that Dynamics 365 products have delivered for customers between 2010 and 2018. According to this report, an average return of $16.97 was realized by customers for each dollar invested in the solution, over the first three years of deployment¹.

Although a standard basis for the calculation of ROI for an ERP project has not been agreed upon, it is certainly possible to apply a data-driven model of structured analysis. As an initial step, Total Cost of Ownership should be calculated on the basis of all primary and secondary fees involved, from implementation and hardware to ongoing maintenance, licensing and consultation costs. The more problematic calculation of estimated benefits should be based on the most comprehensive collection of data possible. Sources need to include industry and process-specific statistics across multiple sources, surveys and deployments. Collation of demonstrated benefits, which include inventory, operating costs and enhanced production, should be sourced from as appropriate a comparison as possible. Savings, in particular, should include figures of the particular organization’s standard internal rate of return. ERP systems typically also generate cost benefits that are variable over the pay-back period. Appropriate metrics and identifying mutual dependencies is crucial in factoring ROI estimates.

Conclusion

Rationalizing and integrating processes gives businesses several primary and secondary competitive advantages. ERP solutions facilitate optimized resources, minimized disruption and enhanced process efficiencies to allow an enterprise the opportunity to generate internally coherent and optimal business outcomes. To understand how Microsoft Dynamics ERP can help your business operate to its optimum potential, please reach out to us at marketing@levtechconsulting.com.

¹Elman, Daniel, and Rebecca Wettemann. Dynamics 365 Delivers $16.97 for Every Dollar Spent. www.thinkmax.com/media/a7ea4533-d203-4dda-bfb8-2d239a15f9cc/Pg-yTw/Insights/Articles2019/Microsoft-Dynamics-365-delivers-16.97-for-every-dollar-spent.pdf.