Why you should determine ROI before setting a budget for your new ERP system
Philippe Genre, head of sales for SolvAxis in Switzerland, said that customers often will weigh ERP solutions by focusing on budgeting. It’s a major pitfall that could be costly over the life of the ERP solution, which typically lasts between 10-15 years.
«Buyers make the mistake of focusing on the initial price instead of thinking about the total cost of ownership (TCO), including potential hidden costs and constraints such as the unavailability of competencies,» Genre said. «The perfect choice doesn't exist, but a bad choice will definitely be very expensive. Think about the TCO instead of the initial cost of implementation.»
«Although ROI is an essential step in the implementation of an ERP project, few companies take the steps necessary to calculate it,» said Richard Furby, vice president of services, support and IT for Forterro. «A vast number of companies find that incredibly difficult. They are either reluctant or unwilling to do it.»
In some cases, ERP sales representatives will try to calculate an ROI for prospective clients but it’s not advisable to use them. «Without the customer engaged, it’s somewhat meaningless,» Furby said. «There’s no cookie cutter value equation. It’s different for each business.»
Calculate ROI early
«The task of calculating the overall ROI should happen even before the company starts comparing ERP solutions,» said Scott Malia, COO of Forterro. Yet, many companies fail to invest in the process.
«I don’t see a lot of people saying, We have problems in these three areas. If we fix those problems, it’s going to save us X-amount of money per year,» he said. «Instead, when we ask, ‘What’s your budget?,’ we may hear something like, ‘It’s $50k.’ Or ‘$100k.’ But how did you come up with that amount? What’s the expected return on this project, and how should that weigh against price?»
Companies often come up with unsubstantiated ROI based on previous experiences, online research, or amounts spent by other companies.
«Sometimes companies want to spend too much or not enough on an ERP implementation,” Malia said. «They may be grabbing numbers based on what they spent in the past or what other people are telling them.»
Estimates presented by ERP vendors also can lead to confusion. «They may hear, ‘Well, it’s going to cost $40,000 for licensing,’ from one vendor, and then the next guy says, ‘$100,000 because of the services you’ll need,’» Malia said. «You can be easily misled on the cost because it’s very difficult to compare apples to apples.»
Furby reemphasized the problems associated with using generic online tools to determine ROI. «Calculate the value of the ERP product based on the unique aspects of your operations,» Furby recommended. «You should assess your current overall operations, and then compare that to how you envision your company operating after the ERP project is completed. Try to understand what’s working for you today and what’s frustrating you. If that frustration was taken away, what does that mean to your business? Assess the value against the cost.»
In addition to more obvious areas for ROI, factor in other benefits — like a more engaged workforce, said Alexandre Crettol, director of services for SolvAxis. «If workers can go home on time, feeling secure they’ve done a job really well, that’s another ROI,» he said.
Use ROI to gain ERP momentum
Håkan Magnusson, account executive for Jeeves, based in Sweden, said that establishing ROI is an essential part of getting the support you need for an ERP project. «If you truly determine the ROI that will result from your ERP implementation, then you don’t need to talk about price,» he said. «Instead you’ll be more concerned about losing money for each month that you’re not using the solution.»