Happy holidays! I’m back with my monthly unbiased perspective on the business software environment.
This month’s theme, as promised: Return on Investment – and – the ERP project
Last month we discussed the drivers that allow executives to justify an upgrade to a new ERP system (re-read here). In summary, the common drivers that result in ERP upgrades are:
- Death by spreadsheet
- Wheels are about to fall off the wagon
- Choking from the complex web of too much software and/or too many integrations
- Need to capture more transactions and data (read: growth; maturity of operations)
- Preparation for a merger or sale
- Existing software is no longer supportable by the vendor
Return on Investment (“ROI”) isn’t on this list. Why?
It’s not really a driver. It’s an estimated, projected computation to be factored into a decision to upgrade. And – it’s hard to measure. Repeat: hard to measure. And, it only measures tangible financial aspects. Let’s dive deeper.
Hard to measure: I wonder how many companies look back after doing an ERP upgrade to determine if their ROI and payback projections were correct – or close. I bet few do. Among the challenges about measuring ROI in an ERP upgrade is that there is no golden rule about how to compute it. Sure, there are vendor-provided models to use, and most good finance folks can come up with situation-relevant approaches to computing ROI and projected payback for these projects. Every client we’ve worked with computes it and emphasizes its importance differently. For reference, I’ve written a general definition:
Projected ROI is often measured in the context of an ERP upgrade by looking at (read slowly): [the estimated increased revenues and the estimated cost savings expected from anticipated efficiencies and reduced expenditures once the new system is in place] against [the “all-in” investment in the new system]. Then determine “payback” by looking at [how many periods it will take to recoup that investment].
Each of these variables is subject to interpretation, certainly. Put 10 CFO’s in a room to compute this using identical data and circumstances, and you’d get at least 10 variations of ROI/payback. Hard to measure – right?
Tangible vs. Intangible “returns”: the variables of projected increases, cost savings and investment figures are tangible – albeit subject to interpretation. Rather than rely on tangible measures alone, I recommend we all consider very strongly the intangible benefits of implementing a new ERP solution, once there is a driver in place that justifies an upgrade. Intangible benefits include: having an easier-to-use software environment across many departments, improved sharing of information, use of tablet computers and smart phones to conduct sophisticated operations, enhanced peace-of-mind from having better security and controls and – most importantly – having access to timely, relevant, accurate, thorough data with which to make business decisions.
So – consider ROI, payback and estimated savings and increased revenue as part of the overall result of going through an ERP upgrade. And, consider strongly the intangible benefits to your organization. Please, though – don’t use ROI or payback as the key driver in doing a system upgrade. Upgrades are very challenging all-around – so, do it for the right reasons, not just financial.
If you’re considering an upgrade to your ERP or business software, feel free to ping us with questions about the process, as well as to help you justify undertaking the challenge in the first place.
We’re here to help. Unbiased, independent, and experienced. We’ve got CFO, CPA, software and technology skills that are uniquely positioned to help our clients in this area. My contact information is below. And, click here to see our most recent postings.
Best, and Happy Holidays!
Bob Green, CPA.CITP
Lead Partner, Business Risk and Technology Services