Indications on how to perform a cost-benefit analysis for an ERP system

ERP (Enterprise Resource Planning) is very useful for companies looking to manage their data to draw the smallest conclusion about the movements of their business. This requires a business plan that justifies the investment in new technologies. That is why business leaders are the ones who must establish an economic argument with which to make the case for technology funding.

Both capital and operating expenses must be compared to the expected return on investment (ROI) for any key business purchases. When the projected ROI exceeds the total cost of ownership (TCO), the introduction of a new ERP system should have a positive impact on profitability, but there are several considerations to make before that conclusion can be reached.

At the end of 2021, Sage conducted a recently released Small Business, Big Opportunities survey that reflected that 51% of business owners expected to increase their investment in technology. The survey also revealed that business goals reach into all corners of the business, with customers, staff and cash flow as the main technology aspirations.

The first thing to look at is costs

It is very important to assess the initial outlay and consider the payment stream that will follow with the ERP implementation in the organization. If there are existing systems available, the integration work will seek to synchronize the technologies. File conversion and consolidation of management information will occur. However, the elimination of old procedures and legacy solutions can also generate costs and involve time-consuming data migration.

Once installed, you will need to consider routine testing costs. These are necessary to ensure that the user benefits from the full functionality. And, over time, something similar will happen with periodic ERP reviews and upgrades.

On the other hand, you will have to consider other outlays such as training the team to adapt to the new procedures and allocate a provision for contingencies.

No profit, no nothing

The benefits are not just financial. The use of ERP solutions and optimized resource management processes brings numerous advantages:
  • It helps to simplify procedures
  • You avoid duplicate work and manual handling costs.
  • You will enjoy more information in decision making.
  • You will control the performance of the different departments and the entire organization as a whole.
  • You will obtain more effective and efficient decision-making processes.
  • In the factory, automating manual tasks increases delivery speed and reduces human error.
  • Key workers can focus on higher-added tasks, with guaranteed reliability thanks to global systems that flag inaccuracies and errors.
The purchase of an ERP system should be viewed as a long-term project that translates into benefits for your business.

Many others could be listed, but the most commonly cited advantage of ERP is that it makes all areas of the business move together as a whole. ERP systems make it easier to record and report data through a series of tangible elements.

They also make business tracking processes easier and problem solving faster. With clear data in the hands of decision makers, organizations can set realistic expectations for timelines and costs.

Be clear about expectations

Implementing ERP systems will not transform your business performance overnight. They should be viewed as an enabler of change rather than a solution. We must be conservative in projecting the economic benefits of new ERP systems and processes, lest high expectations lead to frustration.

The advisable thing to do in these cases is to develop a worst-case cost scenario along with a probable estimate. In addition, a solid business case for ERP investment must be established, especially when the economic issue is difficult, with budgets becoming more and more limited. This gives the project objectives a strategic context and will make it easier for you to decide whether to go for ERP or not.

Getting the most value from ERP

A review and update of business processes clarifies the return on investment of ERP implementation. If we conduct regular reviews and use quantitative data in addition to feedback from staff involved in resource planning, the return on investment should exceed the total cost of ownership.

And this is where we again stress the importance of having the investment justified as a preliminary step to introducing an Enterprise Resource Planning (ERP) solution. If a cost-benefit analysis is based on realistic expectations, the objectives are much more likely to be met.

There is no doubt that ERP systems are very useful for proper planning in many circumstances. If we use these tools as we have pointed out in this post, we will have good results and, of course, benefits, especially in the long term.