To get a conversation going with your decision-makers around the ROI (Return on Investment) of a process, tool, or product, it’s a good idea to start with a quick overview of the benefits. But discussing the bottom line benefits needs a deeper dive and some complex ROI calculations. When talking about ROI on ERP systems, it’s no simple task to create the equation that identifies the investment side of the ROI.
Here’s the make or break element when presenting an assessment of ROI — Make the complex ROI calculations more approachable so as not to discourage anyone who might be considering a new ERP implementation.
Because ERP projects are often associated with overruns, ERP implementations are typically received with tepid enthusiasm. Time overruns can sometimes be traced to a breakdown in project management processes or team dynamics. As for cost overruns, they generally result from underestimating cost components and undervaluing certain aspects of the project.
There’s a simpler way to provide true estimates of the cost of ERP software investment and break away from the cycle of overruns. The ERP ROI analysis starts by defining each element, determining the number of items that comprise each element, and identifying the cost per item.
After assessing the many factors to consider, we’ve come up with the five key cost calculations that are likely to impact the ERP software solution you choose to implement:
1 – Determining the Cost of New Hardware and/or Upgrades
Your current ERP software is likely installed on an existing IT infrastructure. There are now Cloud-based ERP solutions and SaaS configurations, which allow service providers to offer many ERP software acquisition, deployment, and usage options.
In choosing which solution is best suited to your business, think about on-premise or cloud ERPs, then factor in the cost of hardware acquisition and/or upgrade, additional servers and/or telecommunications equipment.
Normally computer hardware is purchased, recorded as an asset, and depreciated over its useful life. The additional depreciation in terms of reduced taxes, or improved cash flow should be reflected as a benefit (Return) in your ROI calculations.
2 – Buying a Software Licence or Service
In the past, software licences were purchased, capitalized and depreciated over their useful life, just like hardware. Software-as-a-Service (SaaS) subscription configurations have now dramatically changed how ERP software is purchased and used. So much so that the accounting industry has been challenged in providing clear instructions on how to correctly account for fees paid in a SaaS arrangement.
To offer some clarity on the issue, the Financial Accounting Standards Board (FASB) recently proposed some guidelines to define the accounting treatment of SaaS arrangements. Under the new recommendations, cost elements for fees paid within a SaaS arrangement that includes a software licence element, must be identified and treated just like any other software licence—meaning that they must be capitalized and depreciated over their useful life. However, when the SaaS arrangement does not include a software licence, the cost elements must be charged to operating expenses, just like a service contract.
Clearly, this differentiation of a software acquisition made under an on-premise or SaaS arrangement will impact your evaluation significantly. So the decision must be factored into the ROI calculations on your ERP project.
3 – Customizing Software
ERP products on the market today can provide systems that will very closely fit your business needs. Still, most projects will require some degree of customization. Fortunately, some of these customization costs of ERP implementations can be capitalized and depreciated, adding to the financial benefit of the ROI analysis.
This benefit comes with a cautionary note. Software customization is the single most underestimated ERP implementation cost component and can potentially derail your project or radically impact ROI calculations. What is more, unanticipated software customization costs and delays will impact the full scope of an ERP implementation project.
4 – Factoring External Consulting and Implementation Cost
From an accounting perspective, the total costs of the implementation efforts cannot be capitalized as part of the acquisition cost. However, it is important to identify theses costs and include them in the investment component of the ROI calculations.
External consulting or project management services costs, along with temp services costs, should be included. The ERP implementation must also identify and estimate initial training and data conversion costs.
5 – Evaluating Ongoing Costs
Post-implementation, there are maintenance costs to consider over the useful life of the ERP software. In both on-premise and SaaS configurations, software maintenance fees will customarily be defined when you purchase an ERP system. Your ROI analysis needs to determine the cost of training new staff, or retraining existing staff when software upgrades are installed, as ongoing expenses in order to maintain—and capitalize—your ERP investment.
ERP software is a powerful resource that can take your business up to the next level. With due diligence, a complete and accurate ROI assessment can ensure that your company makes informed decisions up front, acquires the best ERP system for your needs, and is empowered to fully realize the benefits of a new solution.