Analyzing the Costs and Benefits of an ERP System

Enterprise Resource Planning (ERP) is a desirable proposition for businesses looking to consolidate management information and disperse it throughout the company. Yet, an economic case has to be made to justify the investment.

Both capital and operational expenditures must be compared to the expected return on investment (ROI). Where the projected ROI exceeds the total cost of ownership (TCO), introducing a new ERP system should positively impact profitability. Still, there are several considerations to be made before one can arrive at that conclusion.

What are the costs of an ERP system?

Businesses need to consider acquisition expenses and the costs associated with deploying ERP across the workforce. These costs can include:

• Capital resources used to fit the solution to new business models
• Time to integrate existing and new technologies, including converting files and consolidating management information.
• Routine testing, periodic ERP reviews, and upgrades, which may be required over time.
• Training to help team members adapt to new procedures.

What are the benefits of an ERP system?

ERP purchases should be considered a long-term purchase, so it is essential to consider the benefits it will bring to the business, including:

• Streamlined resource management processes, which simplify procedures, reduce re-work and decrease manual handling costs.
• The automation of manual tasks, which increases the speed of the delivery and reduces human error. Key workers can then focus on value-adding tasks, with reliability ensured thanks to all-encompassing systems which flag up inaccuracies and mistakes.

The most commonly cited advantage of using ERP systems is that it gets all business functions moving together. ERP systems make it simpler to record and report data across a range of tangibles, making monitoring business processes easier and troubleshooting instantaneous. With precise data in the hands of decision-makers, organizations can set realistic expectations in terms of timescales and costs.

Setting reasonable expectations

ERP systems won’t change business performance overnight, and they are in many ways an enabler of change rather than the remedy. It makes sense to be conservative when projecting the economic benefits of new ERP systems and processes, as unrealistic goals can significantly impact the perceived success of the implementation.

Working out a ‘worst case’ cost scenario, along with a ‘likely’ estimate, is advisable for businesses, but establishing a sound business case for investment in ERP is equally as important, particularly in a tough economic climate with budgets remaining constrained. This gives project goals a strategic context, making it easier for executives to decide whether to opt for ERP.

Information used in this article was provided by our partners at Sage.