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Evaluating the potential ROI of an SAP upgrade

ROI expert Tom Pisello outlines his formula for how to calculate ROI for an upgrade.

Hi Tom,

Here's the deal: we are a manufacturing company with four plants, all in the US, running R/3 4.6. Our SAP rep is buzzing like a fly around a pot of honey trying to convince us to upgrade. She's listing all these great new functions, which certainly would be nice to have. Thing is, we don't really have a problem with our current system, dated as it may be.

This is obviously a fairly complex situation, but I was hoping perhaps you can recommend a good approach on how we can best evaluate the potential ROI -- and compare it to our current system? Thanks!

Any time a sales representative is being aggressive I automatically go on the defensive and the attitude makes me skeptical. It appears that you are in a similar position, and that is justified.

That being said, there may be true value to performing the upgrade. But it's up to the vendor to quantify the value for you – not just list all of the cool features and functions the upgrade will provide. After all that new feature will not pay for the upgrade, unless the vendor is able to prove and demonstrate true business value of the features and upgrade, relative to the current version, and relative to the migration and upgrade costs.

Here's where you may want to look for quantified value, with the first being more direct (hard) benefits, followed by the more indirect (soft) benefits:

1) Can the new system provide lower total cost of ownership (TCO) – many times, the latest upgrades provide systems that are easier to manage and maintain than prior versions, are faster and require less hardware, or are licensed differently leading to lower support and administrative costs. For TCO to be lower, look for savings in:

a. Less server hardware required to host the application
b. Lower database size or less instances
c. Less development / test staff for application customization / integration
d. Less application software annual maintenance and support fees
e. Lower application / database administration and support costs
f. Lower IT operations and support staff managing the infrastructure
g. Avoidance of consulting and professional services / mission critical support fees
h. Lower bandwidth consumption

2) Streamlined business processes – with system upgrades new capabilities are provided, helping to streamline and automate additional business processes or share data to optimize the process.

a. Additional improvements in business processes

    i. Task avoidance ii. Process fees and expenses iii. Reduced errors iv. Improved transactions

3) Improved availability and service levels – often, system upgrades can provide higher availability and service levels – as applications mature they become higher performance and more reliable (most of the time).

a. Less downtime
b. Less performance tuning
c. Improved user productivity via higher performance
d. Improved transactions via higher performance

4) Higher agility – with some system upgrades, the development and deployment team can do more with less resources, and faster.

a. Value of deploying new applications / business process improvements sooner.

If the sales representative cannot just as aggressively demonstrate the personal value your organization can bank on from the upgrade, kindly show the sales person the door, and be sure to invite them back when they can.

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