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ERP Implementation Methodology Best Practices & ROI

How do you begin to estimate the anticipated ROI of an ERP system? What would be a reasonable methodology?

Answers

Topic Expert
Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

The impact of an ERP system on your business can be broad – however all of the impacts are not easily measured. You will need to apply judgment specific to the specific situation. Some things to consider:
1) IT Costs. This is often the most measurable. These include hardware costs, replacement costs, personnel costs, ongoing training costs, related services costs, software and subscription costs.
2) Productivity Impact. If there are specific areas you are looking to improve team productivity and effectiveness you can estimate the impact of better system support or better integration. The impact of data error and correction in un-integrated systems is a valid ROI component.
3) Visibility Impact. Often you expect your new system to provide better data and better access to that data. If it isn't possible to get reliable data now – but the new system makes that possible – you are looking at the impact on decision making or financial control due to better information. Additionally information velocity – how fast data moves through your organization and gets to the right people – is often an estimatable value.
4) Audit and Compliance Impact. Better controls and provable repeatable processes reduce audit and oversight costs. Compliance – whether with GAAP or ISO or whatever other industry requirements you have - are often better served with your new system. You could save money through lower oversight and review costs, or you could make more money by better demonstration of quality controls which please your customers.
5) Risk Impact. This is a real cost – but is often hard to estimate. How much risk is built into your current system? Risk can be embedded in people based processes where you are highly dependent on specific people or specific skills sets for some company functions. It can be the risk of revenue leakage or unhappy customers – since poor administration execution has an impact on customer satisfaction. Or it could be the risk of your system going down and never coming back up if you are on an unsupported product version that few people understand.

Hope this helps.

Bob Scarborough

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Robert, if you haven't already, you should definitely get your free copy of:
"Eight Rules For Investing In A New Accounting System:"

https://www.proformative.com/whitepapers/eight-rules-investing-new-accounting-system

I think it will really give you some great insights into what's possible in maximizing the return on the investment.

Enjoy! Best... Sarah

Topic Expert
Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Here are a couple of add-ons to the wise comments above:

1. Look out 3-5 years for costs from day 1 of the project; user counts may increase, for example.
2. Some benefits may only materialize AFTER the solution is in use for some time, so allow for progressive improvements, not 100% gain in year 1.
3. Software vendor quotes/bids are only part of your costs. Factor in backfilling staff during their work on the project. Allow for integration with other current systems in your business, and other costs that may change due to the new system.
4. Don't project headcount reductions (or avoiding extra hires) unless they are whole FTEs (units of one). You rarely can cut/avoid 0.333FTE.

Regards
Len

David Smith
Title: Manager
Company: Private
(Manager, Private) |

Assume that your company will spend more, that it will take longer, require more training, require more customization, have fewer benefits and greater problems.

Then, go on the record about it. Trust me, if the project is unstoppable, you're half way to looking like the second coming of Nostradamus.

Oh, and assume that hired consultants are lying to you. That is, lying by omission. Not bad people - just motivated by different desires and not under oath to tell you everything that might disable the ICBM hurdling toward its target.

Then, with that reduced set of expectations and jaundiced eye to what you are being told, urge all to think twice about proceeding further.

If your organization does choose to proceed, no one will accuse you of being a starry-eyed optimist. Your goal is to avoid the eventual circular firing squad that will form up on parade grounds. Plus, whatever you manage to achieve above your limited expectations will look like absolute genius.

That reminds me, once the project is a go, you definitely have to give it your all to make it successful. Don't worry, it won't matter. It's smoking crater will still make you look like the 16th century French apothecary.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

David, you forgot to get the large bottles of Zoloft or your favourite anti-depressant to enable you to forge ahead :)

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Is ROI really the best metric? Is ROI really identifiable? What's the time frame? Is ROI still a good metric to use when it comes o current business concepts and business models?

As an example (among many new companies), Amazon has been investing in technology since it's inception. It invests in technology for a variety of reasons. In pursuit of market share (some never even came to fruition), to support a business vertical (some that is losing money), etc. When an ecosystem concept of business models is used, there will be winners and losers (within the company) and some will be "sacrificed" (in this context, spend without an estimatable return) to let the other thrive.

If the investment in Amazon Fire was evaluated solely based on ROI, I don't think they would have even went ahead with the project. Yet, Amazon Fire has contributed to a thriving Amazon ecosystem.....and that is NOT easily (not saying impossible) identifiable.

Again I ask, is ROI the end all and be all? Something to think about!

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

As a P.S., Direct financial returns are NOT the only metric. How do you figure out ROI when increase in "reputation" or "brand" is expected that eventually leads to increase in stock prices? (and often, the increase in stock prices are attributable to ALOT of many small and combination of things).

David Dobrin
Title: President
Company: B2B Analysts, Inc.
(President, B2B Analysts, Inc.) |

To the many wise answers above, add the following terribly important point. The odds of failure are very high for an ERP system, so any return number you use in the numerator (Return on Investment) should actually be an expectation: the return times the probability of achieving that return. Since even the most optimistic observers think that the probably can't be above 50%, all things being equal, this means that you should take the ROI you've come up with, after factoring in all the considerations above and then just halve it.

Of course, the real answer is that ROI is a wild goose chase. Thinking about the ROI of an ERP system is like thinking about the ROI of a building or of a security system or of any other piece of infrastructure. It's just the wrong measure. If you think you need a new building, then you should get one, but don't imagine that there's any realistic way of justifying it using ROI measures.

Years ago, people used to sell word processors by claiming that there was ROI on the investment. Obviously, there wasn't, or at least there never was in any organization I ever looked at. Secretarial productivity may have increased, but that didn't mean that personnel costs went down (because nobody ever fired the more efficient secretaries or started assigning them to more people). And there was never any way to show that revenue or other tangible returns actually increased. Still, people bought them, because it was a better way of doing business. So that was the return. Ditto with ERP. If you think your business will run better with one and it doesn't hurt too much and your consultants aren't complete lying scum and you're willing to accept a high probability of failure and humiliation, maybe you should do it.

Maybe.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Amen!

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

But then again, implementing a new ERP system that is well thought out in advance, with clear understanding of the pitfalls, the problems, the issues and the costs of both dollars and time will yield better (I'll never say perfect or even great) results out of the box.

We need to see larger pictures than dollar and cents on every investment (your "Wang" example is great!).

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