The major stumbling block in calculating the ROI of an ERP project lies in how a business operates. Each business functions differently and therefore calculate their costs and returns differently. However, here are the essential factors to consider when defining your costs and returns.
The ratio of investment of an ERP is the ratio between the investment and cost of investment. Calculating this ratio is relatively simple if you have the expected returns and the cost of investment. To calculate the ROI of an ERP project, subtract the cost of investment from the expected returns. After that, divide the resultant value by the expected cost to land your ROI. Take note that you can multiply your ratio by 100 if you want your R.O.I in percentage.
ROI of an ERP project – defining and calculating your costs
The expected cost of successfully implementing a new ERP system is more than the upfront cost you would pay for say a system such as Odoo ERP. Here are the significant factors that affect the total cost of installing a new system.
Coming in at first is the business environment and how it affects the system. For this section, you’ll have to look at the customisations and modules/plugins needed to complement the system. Note that these will significantly affect the resultant cost. Additionally, also factor in the licensing fees and SaaS subscription rates. These figures are often overlooked, even though they are part of the cost of investment.
In the second place is the implementation process. Before landing any system like Odoo ERP, you will have consulted on configuring, migrating, and installing the system into your business. Doing this affirms that the deployment is a success and there are no extra costs. Conversely, failing to consult saves you consultation fees but also reduces your chances of success. In simple terms, If the system were to fail, you’ll still spend more than you would with a consultant. All things considered, whether you decide to consult or not, the cost of investment will include consultation fees and extra fees spent in case of failure.
The final factor to consider is maintenance. Does the new system need upgrades and patches? Will you need to extend your existing maintenance contract after a while? Also, you’ll need to couple factors like the system’s life span and the way forward if your business outgrows the system. And if so, what next is the system scalable or flexible to adjust? And in case of adjustments, how much will it cost to implement these adjustments.
Calculating your expected returns
With the expected expense done, the next part would be getting your returns right. Proper calculation of returns focuses on the system’s advantages in terms of cost. A good starting point is how the new system resolves complex problems, how the new system has increased production, and how the new system has reduced the use of human resources.
Another talking point is the opportunities that the new system brings. Will the system allow you to make smarter choices, particularly around vendors, buyers, and negotiating contracts?
While these might not translate to figures, they’ll defiantly affect your expected returns. With that in mind, check whether the decision you make affects your business positively to land you a profit.
The last factor is time. How long would take to implement the system? and what are the risks associated with the new system? These might not translate to financial figures but they’ll likely impact your cost and returns. Therefore, ensure that the system takes the least amount of time to implement.
The bottom line
All in all, calculating the ROI of an ERP project is crucial for project planning and evaluation. As a result, it should be as accurate as possible. The key takeaway to a successful ratio of investment involves taking an inclusive analysis of the cost and return involved with the new system.
Talk to our experienced consultants to help implement your ERP system.