If we were a company looking to implement an ERP, how would we calculate the ROI on SAP? Are
there any tools to help do this?
Typical organizations can expect risk-adjusted ROI ranging from 100 to 400 percent for most projects, making them some of the best projects in a company's portfolio. These projects are particularly effective if the team can select a platform that can cover the entire enterprise, but focuses particular projects that take no longer than three months to implement, deliver a six-month paybacks from deployment, and focus on a small set of specific and critical business process and key performance indicator improvements.
A cost-benefit analysis of an ERP solution is best calculated by examining the following key elements:
* ERP project costs will include items such as software, servers, client upgrades, network upgrades, support and maintenance contracts, professional services, IT training, application customization and development, implementation labor and on-going support and administration.
* Business unit costs are often underestimated and include user training and change management.
* Operating efficiency benefits are the process improvements that can help the company improve productivity, re-deploy labor resources, avoid purchases or eliminate expenses.
* Business benefits are improvements in revenue or development of new revenue opportunities.
* Project risk includes everything from schedule and budget overruns, functionality shortcomings, slow adoption and resources risks that may affect planned costs and benefits.
* Intangible benefits are strategic and important but non-quantifiable in monetary terms such as brand advantage or business agility.
The tangible costs and benefits can be analyzed and presented to the team using five key financial calculations:
ROI = net benefits / costs
Risk adjusted ROI = Net present value (NPV) of net benefits / NPV costs.
Net Present Value = net cash flow of the project translated into today's dollar terms using a risk adjusted discount rate.
Internal Rate of Return = the effective project return, calculated as the discount rate for this project which brings the net present value equation to zero.
Payback Period = the period it takes, usually in months, for the project to reach cash flow positive (where cumulative benefits exceed cumulative costs).
This was first published in September 2003