ERP (Enterprise Resource Planning) systems are a key tool for managing a company’s resources, enabling the integration of various business processes. An investment in ERP can bring significant benefits, but its cost is also substantial. To assess whether an ERP implementation is cost-effective, it is necessary to calculate the ROI or return on investment. In this article, we will explain ROI, how to calculate it and assess its value in the context of an ERP investment.
What is ROI?
ROI (Return on Investment) is a financial indicator that determines how much return an investment has brought about the costs incurred. It is one of the most popular methods of evaluating the effectiveness of projects, especially those requiring significant financial outlays, such as implementing an ERP system.
ROI measures whether an investment is financially beneficial and to what extent the expenses have been returned. Thanks to its simplicity of calculation, this indicator is widely used by both large corporations and smaller companies.
ROI - what does it inform about?
ROI informs about the profitability of the investment, which is particularly important for entrepreneurs planning to implement ERP. A positive ROI means the investment makes a profit, while a negative ROI indicates a loss.
In the context of ERP, ROI can indicate benefits such as:
- reduction in operating costs,
- increased labor efficiency,
- improved data quality and decision-making processes,
- greater customer satisfaction, which translates into higher revenues.
The formula for ROI
The ROI formula is relatively simple:
The values in this formula include:
- Investment benefits - the sum of savings and additional revenues resulting from ERP implementation.
- Investment cost - the total cost of purchasing, implementing, and maintaining an ERP system.
What kind of ROI is good?
Good ROI varies depending on the type of investment and the specific industry. In the case of ERP, achieving a positive ROI after just a few years after implementation can be considered a good result. In general:
- ROI above 0% indicates a profit,
- ROI below 0% suggests a loss,
- The higher the ROI, the better the profitability of the investment.
The typical payback period for ERP systems is 2 to 5 years, and an ROI of 20-30% per year is often considered a good result.
How much does ERP cost?
ERP implementation costs can vary widely and depend on many factors, such as:
- Size of the company - larger companies require more advanced systems.
- Functionality of the system - the more modules and integrations, the higher the price.
- Licenses - the cost of purchasing licenses (one-time or subscription).
- Implementation costs - include installation, configuration, data migration, and employee training.
- System maintenance - ongoing updates, technical support, and server costs.
The cost of ERP for a small company can range from tens of thousands of zlotys to millions of zlotys for large corporations.
How to calculate the ROI of ERP?
Calculating ROI from ERP requires considering both the cost of the investment and the benefits the system brings to the company. The key steps are:
Determine the investment costs
The sum of all ERP-related expenses, including:
- license purchase,
- implementation and training,
- IT infrastructure costs,
- maintenance and upgrade costs.
2. Identify the benefits
Benefits can be divided into:
- Cost savings: reduced errors, reduced process time, reduced administrative costs.
- Increased revenue: better customer service, faster time to market.
4. Determine the payback period
Analyze how long the benefits achieved will outweigh the investment costs. For example:
- If the investment cost 500,000 PLN, and the annual savings are 150,000 PLN, the ROI will be:
The savings can offset the cost in the second year, and the ROI will be positive.
4. Consideration of additional factors
It is also worth considering intangible benefits, such as improved team morale, better interdepartmental cooperation, or increased compliance.
ROI is a key indicator that allows entrepreneurs to assess the profitability of investing in an ERP system. Calculating ROI requires considering all the costs associated with implementing and maintaining the system and the financial benefits it brings. A well-planned ERP implementation with a positive ROI improves a company’s operational efficiency and increases its competitiveness in the market.
