Calculating ROI of an ERP implementation

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ERP projects are typically significant investments in time, effort and capital for most companies. These projects take 6 to 18 months to implement, depending on project scope, but even with their significant investment and deployment time, deliver solid paybacks for most companies within 2 to 6 years of the project start. Because deployments and user adoption take time and business change needs to occur around the technology platform, these projects are not adverse to risks.

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).