The importance of ERP ROI Analysis


While organizations initiate ERP projects for a variety of reasons, a substantial return on investment (ROI) is a motivation for most, if not all, organizations. A business case outlining the costs, expected benefits and ROI of an ERP implementation is an integral part to initiating an ERP project.

For many organizations, a business case is the tool with which ROI is calculated. While calculating ROI is considered best practice, some organizations consider ROI to be a moot point as they have other reasons for implementing a new ERP system. Regardless of the motivations of an organization, determining ROI for an ERP project is best practice for several reasons:

1.   ROI provides a solid justification for an ERP implementation from a financial standpoint. It almost goes without saying that a project will not gain much traction if there are not potential material benefits. This may seem like common sense, but the importance of quantifying business benefits, regardless of other key drivers, cannot be overstated. Rare is the CFO that would advocate a project without a substantial ROI clearly defined. Aside from providing justification, ROI can provide a much needed reminder down the road of why an ERP project was undertaken in the first place. ROI can be a simple yet powerful tool for retaining executive buy-in if the sailing is not so smooth during a protracted implementation.

2.   ROI can be a valuable criterion for selecting the right ERP software for your organization. During software selection, organizations can calculate ROI for prospective ERP vendors. While ROI estimates should not be the only deciding factor in selecting ERP software, it generally is one of the more important elements.

3.   ROI can be used as a tool in benefits realization after go-live. An ROI calculated at the beginning of a project represents the expected benefits that can be achieved from an ERP implementation. For example, some expected benefits can be efficiency gains or optimized personnel through minimizing non-value add activities such as manual processes that will be automated in the new ERP system. If a projected ROI is not achieved after go-live, organizations can use root cause analysis tools to identify and rectify process and system performance gaps so benefits can be fully realized. In this way, ROI becomes one of the highest level metrics of benefits realization. If an expected ROI is achieved following go-live, the ERP project can be considered a success from a financial standpoint.

It is critical for organizations to recognize that ROI provides more than just a financial justification for an ERP implementation. Leveraged correctly, ROI is both a tool for selecting the right ERP system and an overarching metric that gauges the relative success of an ERP project after go-live and beyond.