How to perform a cost-benefit analysis for an ERP system

We explain the keys to perform a cost-benefit analysis of the adoption of an ERP system.
  • ERP is one of the best allies for the future of your business.
  • The cost-benefit analysis must be based on realistic expectations. Here's how to do it.
Enterprise Resource Planning (ERP) is a very attractive proposition for companies looking to consolidate management information and introduce it throughout the company, but to introduce new technologies, a business plan is needed to justify the investment.

According to the Small Businesses, Big Opportunities study conducted by Sage at the end of 2021, which was recently published, SMEs in much of the world are clear. Fifty-one percent expected to increase their investment in technology. And their improvement goals reach into every corner of the business, with customers, staff and cash flow at the forefront. So it makes perfect sense to consider end-to-end ERP solutions that bring consistency to the entire flow of data and information.  

But before implementing ERP in their organization, business leaders must establish an economic case for the investment. Both capital and operating expenses should be compared to the expected return on investment (ROI) for any key enterprise 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.

Take into account the costs

You must take into account the initial outlay for the acquisition. In addition, you have to consider the payment stream that will occur later with the implementation of the ERP in your organization.

If existing systems are available, the integration work will seek to synchronize the technologies. File conversion and consolidation of management information will occur. However, eliminating 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. 
  • An item for possible unforeseen events.
Consider the benefits

The use of ERP solutions and optimized resource management processes brings countless 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 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 value-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 often 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.

Set the level of expectations

ERP systems will not change business performance overnight. In many ways, they are an enabler of change, rather than the solution. It makes sense to be conservative in projecting the economic benefits of new ERP systems and processes. 

Ultimately, it makes sense to be realistic, and if you are over-expecting the various departments in your business, you can create frustration. This will only worsen the perception of ERP.  In the end, you will reduce the involvement of the team and lose some of the potential benefits. 

It is recommended that you develop a worst-case cost scenario along with a probable estimate. In addition, you should establish a solid business case for ERP investment, especially when the economic climate is difficult, with budgets becoming tighter and tighter. This gives the project objectives a strategic context and will make it easier for you to decide whether to go for ERP or not.

Achieving maximum value from ERP

If you review and update business processes periodically, the return on investment of ERP implementation is clear. You will conduct periodic process reviews and use quantitative data. With feedback from staff involved in resource planning, the return on investment should exceed the total cost of ownership.

As a preliminary step to introducing an Enterprise Resource Planning (ERP) solution, you must have the investment justified. This requires a cost-benefit analysis based on realistic expectations.

ERP systems are very useful for the correct organization of a company for different reasons. The use of these tools will give great results and benefits in the long term.