How do you financially justify a new ERP system?
When deciding on this size, most companies require a cost-benefit analysis in the form of a return on investment (ROI) statement. The cost side is easy – add up the expected costs. On the benefit side there may well be direct savings in IT costs, but enumerating the significant benefits requires the company to envision how the system will change the workplace and enable higher performance, improved productivity, and better customer service.
Improved performance
Many ERP system projects are justified to a great extent on expected improvements in efficiency (direct labor reductions) and cost savings (including, but not limited to, inventory reductions), and rightly so as these are substantial payback benefits in many successful ERP implementations. Be aware, however, that the system does not create these benefits by its mere existence in your company. The system organizes, analyzes, and presents data in such a way that managers can better utilize people and make better decisions, which is what will generate significant benefits. Keep that in mind when you budget for user training and implementation of improved procedures.
Better customer service
These benefits are less direct but even more valuable. By better-serving customers, you can theoretically increase sales and profits, increase market share, and perhaps even increase margins because good customer service adds value for the customer without adding cost to the product itself. In some cases, customer service improvements become survival requirements because when a new or good customer expects capabilities such as electronic ordering or enhanced electronic reporting, your ERP system needs to deliver.
Workplace changes
Today’s systems are designed for usability (UX or user experience is the current buzzword) for quick and easy access to information. Because each user’s job and workflow is unique, today’s systems are highly tailored to give each user the most efficient and comfortable work screens and processes. Think of cost avoidance rather than cost reduction for this benefit. This increased efficiency will help current employees do more and handle a higher volume of business without new hiring. It is inadvisable to justify the system based on reduced headcount – it probably won’t happen, and the prospect of job losses will not motivate workers to embrace the system and help it succeed.
Source: SAP Insights
