ERP ROI Calculator:

How to Get a True

Return on Investment (ROI)
Calculation
Most enterprise resources planning (ERP) projects come with huge expectations of
all the business benefits they will deliver. Indeed, when implemented correctly, they
can provide insight into real-time data, streamline your production processes, reduce
costs, improve collaboration and ultimately help drive business growth.

While most organizations, especially those in manufacturing and distribution rely on

ERP systems, many struggle to fully optimize the capabilities the software can offer.
In fact, according to Gartner, 55 to 75 percent of all ERP projects fail to meet their
objectives1. This is an astonishing figure considering the business-critical nature of
an ERP system, and taking into account how much money, time and effort goes into
ERP selection and implementation.

Common problems with ERP projects

Among the contributing factors for project failure are going over budget; missing
deployment deadlines; lack of transparency in the implementation process; choosing
the wrong vendor or partner; and not realizing the anticipated return on investment.

Complications and obstacles are part of the process, but it doesn’t mean your project
is doomed from the start. Understanding the common factors that impede ERP
projects and learning how to to avoid them can drastically improve your likelihood of
success.

No Roadmap: Many organizations carry out ERP deployments without a step-by-

step roadmap, making it difficult to achieve continuous improvement. Using a road
map jointly developed by the business and IT can help gauge business value and
help drive future applications investments.

No clear benchmark: In some cases, ERP implementation begins without a clear

understanding of the goals or targets to be attained. As a result, progress is not
measured against the pre-implementation environment, making it difficult to track and
quantify improvements.

Fear and uncertainty: Employees are often apprehensive and uncertain as to

whether they will be able to carry out their jobs as well as they did with the previous
system. Likewise, IT managers may be afraid the new software will make their
responsibilities more complex, reduce their value, or even put their jobs in jeopardy.
Miscalculation of project demands: Organizations often underestimate the amount
of time, resources, and outside support required to implement the project—as well as
the commitment required to continuously enhance and improve the system after the
“go-live” event.

IMPLEMENTATION PITFALL: What is the biggest mistake organizations make that

hinders their ability to optimize ROI? “They don’t pursue continuous improvements
after go-live. Getting the ERP system active is just the first step. ROI takes follow-up
training and business process revisits to ensure you are efficiently utilizing the system.
Sometimes the most innovative functions of ERP are not implemented initially. They
are planned for phase 2, but too often phase 2 gets put on the back burner."
MỤC LỤC

Understanding the value of ERP ROI........................................................... 1

Calculate the ERP Costs............................................................................... 3
Forecast expected ERP returns ................................................................... 6
Decide who should analyze your data ......................................................... 7
Calculate the ERP ROI .................................................................................. 9
About GIMASYS .......................................................................................... 10
 UNDERSTANDING THE VALUE OF ERP ROI

The ERP system you use to help manage your business must earn money for your
organization.

The ERP system most organizations select must earn an awful lot of money.

If you cannot reasonably predict earnings from your ERP that sufficiently outweigh
your system costs, you should probably look for another place to invest your hard-
earned cash.

Return on Investment (ROI) is easily the most common method used in business to
measure project returns and to compare these with other potential investments. This
is a simple metric on the surface; it is calculated by adding up the expected return
from an ERP system and then subtracting the expected costs of the ERP. Divide the
result by the expected cost and the quotient is your ERP ROI. Generally, the larger
the quotient, the better the investment ranks among investment choices.

Yet the reality is that calculating ERP ROI and analyzing the final figures is a
complicated process fraught with misconceptions and challenges. That’s why we’ve
put together this guide - we’ll cover which costs to consider, how to forecast returns
as accurately as possible, and totaling it all up to create a realistic ROI figure that you
can use to measure your new ERP’s success against expectations.

ERP ROI is flexible

ROI can provide a flexible metric to measure ERP project success. This can be an
advantage, as different people from different disciplines might define the costs or the
returns for an ERP project in their own way.

This flexibility can also be a disadvantage. ERP ROI defined in one way may not be
relevant to another department with a different interpretation of costs and returns. The
importance of keeping the calculations consistent cannot be overstated.

It is also worth noting that time is not a factor in return on investment. Compare two
potential ERP investments, each with a cost of $75,000 and an expected return of
$100,000. Both show a 33% ROI and seem to be investments of equal merit. Dig a
little deeper and we might learn the entire cost on one project must be paid tomorrow

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and the return won’t be seen until next year. The other has costs spread over the next
six months and begins to show returns after the third month with the entire return
expected by the end of the year. Clearly, the second choice is the wise investment.

Factoring temporal elements into ROI calculations

We can add a temporal element to our ERP ROI calculation using payback period
which looks to see how many months it takes to recapture ERP costs. Another more
sophisticated metric that captures the value of time is internal rate of return (IRR).
Costs in the next month are more expensive than costs in a future period. Gains that
begin sooner are more valuable than a gain later. IRR provides a percentage value
that looks like the quotient in ERP ROI.

A further potential shortfall in the use of ROI is risk. How certain are you of your ERP
project costs? The answer to that question will depend heavily on your ERP budget
planning and cost forecasting, and how transparent vendors are about their pricing
structure. Always keep in mind that even the most accurate ROI is an estimation only,
which can be altered by a number of factors outside of your control.

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 CALCULATE THE ERP COSTS

How will your ERP system will be deployed?

How the ERP system is deployed significantly impacts the cost estimates. These are
two options:

On-premise (on-premise): On-premise deployment is the traditional way legacy

ERP systems have been implemented for decades. The hardware and software are
purchased and installed on a company’s own servers, and the system is maintained
and upgraded by the company.

True cloud: In a true cloud deployment, the system runs entirely on a public cloud
with hardware and software owned and supported by a third-party provider. This is
the primary licensing model for software-as-a-service (SaaS) ERP, CRM, and similar
solutions.

Calculate the ERP cost of both systems

This section of the worksheet is designed to calculate the total cost of ownership
(TCO) for both the existing ERP legacy system and the new replacement system.
There are typically four areas of investment:

Infrastructure costs Year 1 Year 2 – 5 5 – Years

Total
Initial hardware
Ongoing upgrades and maintenance
System software license
System software upgrades and
maintenance
Networking equipment and fees
User devices
Infrastructure facilities fees
Subtotal Infrastructure
Total 5-year Difference

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ERP software costs – business and productivity applications

Here, you will want to budget for the cost of upgrades and expansion beyond the
initial purchase. The annual fees may rise over time as additional users or
applications are added, depending on a supplier’s pricing strategy.

Software costs Year 1 Year 2 – 5 5 – Years

Total
Perpetual license fee - Initial cost
Perpetual license - Ongoing annual
fee
Annual subscription (SaaS)
Annual maintenance fees (SaaS)
Subtotal Software
Total 5-year Difference

ERP implementation costs

Next you need to estimate the costs of implementing both the initial system and the
planned upgrades over the five-year period. Most software suppliers have one or two
major releases during a year. Each release is in fact a mini implementation. First, the
project team must review the release to determine the overall impact to the current
business process. Then the release is loaded and tested. Before going live, the users
should be sufficiently trained on the new software. Potential costs to consider include:

Implementation costs Year 1 Year 2 – 5 5 – Years

Total
Staff project team
Consultancy fees
Data conversion, input, and testing
User education and training
Subtotal Implementation
Total 5-year Difference

Ongoing ERP personnel costs

Estimate the “normal” operational costs for keeping your new ERP business system
up and running. When considering on-going (recurring) costs, be as realistic as
possible and include a reasonable expectation for escalation or inflation year-to-year.
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The major items will be a blend of internal IT staff and consultants’ time and expenses
such as:

Personnel costs Year 1 Year 2 – 5 5 – Years

Total
Infrastructure support costs
Backup and disaster recovery
Network and devices support
Periodic bug fixes
Software integrations
Software customizations
User’s mobile device support
Subtotal Ongoing Personnel
Total 5-year Difference

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 FORECAST EXPECTED ERP RETURNS

If the five-year cost of the new system is more than the cost of maintaining the legacy
system, then you will need sufficient additional benefits to justify making the change
– otherwise, why make the switch?

Some of the new system’s benefits are by nature a bit harder to separate out and
assign to the new system but well worth the effort to do so. In most cases, there will
be plenty of direct benefits to more than justify the new system implementation. But
documenting and estimating the indirect benefits will help in project planning, setting
priorities, and measuring the results of the ERP implementation on the organization.
Even if you cannot assign a monetary value to these benefits, go ahead and list them
in the ROI worksheet and the project plan.

Department: ….

Process to be Direct Annual Indirect Annual 5-Year Strategic

improved Benefit Benefit Total Benefit

Total

Summarize all the ERP benefits

Once all the areas of improvement have been considered, add the sum of the five-
year total from each department to determine the total benefit.

Department Total 5-year benefit

1.
2.
3.
4.
5.
Total Project ERP Benefits

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 DECIDE WHO SHOULD ANALYZE YOUR DATA

The process of calculating ERP ROI will usually start with the goals you set for your
ERP project. Your thought leadership team met several times and you have goals
from several disciplines – right?

Those goals are the reason for evaluating an ERP using an ROI calculation. By now,
you have determined the costs and returns associated with these goals.

Now it’s time to connect the dots. First though, you’ll need to put together a team
capable of analyzing the cost and return figures that you estimated.

Liaising with key project Stakeholders

Let’s say you expect to reduce inventory and free up working capital. People from
finance and materials will work together on this type of goal and the corresponding
ERP ROI calculations.

Which component parts and how many of each will you reduce from inventory? Will
there be any negative effect on deliveries from a reduction in inventory?

In this case, an ERP ROI calculation will only be valid if any negatives such as lost
sales from the reduction count as a cost against ROI. This information is only
available if the right departments provide input for the calculations.

You may hope to win more profitable customers with a new-found ability to improve
throughput. Look carefully at returns and costs linked to this goal and include all the
relevant departments in the final calculations. Sales experts should detail the SKU
that customers might order and the margin on that item. Operations should check the
other side to ensure the costs expected are reasonable and that capacity will be
available. Operations might also see other gains if throughput improves significantly.
Could overtime expense be reduced? Could they eliminate the graveyard shift?
These possibilities would yield even more returns than sales would have predicted in
their own ROI calculation.

To sum up: your ROI figure will only be representative of real-world costs if you
consult with experienced personnel across the company.

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Get your analysts on board

Analysts from finance should coordinate all estimates of costs and returns. They
already have the necessary skills, and centering the analysis within a core group of
analysts ensures methods are consistent. All departments will have some bias that
can affect the ROI process. Your analysts may have their own bias, but it is their job
to ensure these are eliminated during the calculation of ERP ROI.

These financial analysts should also be forecasting ROI for other potential
investments. While ERP is important, there are other ways to spend money that might
earn even more than ERP. Again, by having all the analyses performed in the same
manner, by the same team, all those potential investments can be lined up and
compared by a common metric.

The final figure

C-level will insist on accuracy. Nothing will derail the choice of ERP faster than
discovering the ERP ROI assumptions are inconsistent with assumptions made on
other project calculations. If there is any uncertainty, overestimate costs and
underestimate returns. ROI is unlikely to be the only metric used to make an ERP
selection decision. A poor ROI is a great way of eliminating potentially poorperforming
systems. Once you’ve identified which potential ERP systems are likely to offer a
good ROI, you should examine them in further detail.

What is the probability any change will be as estimated? For example, If you project
that a new ERP will reduce staff by four to six employees, what is the probability
actual staff reductions will fall outside this range? As well as probing forecasts further,
the timing of costs and returns will also be reviewed during the final project selection
phase.

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 CALCULATE THE ERP ROI

By now you have completed most of the hard work involved in calculating ERP ROI.
You have a good estimate of your costs and returns for the ERP system. You and
your team have examined the factors and agree that the numbers are as accurate as
you can get them. You have shared those numbers with people throughout your
enterprise as communication is a crucial part of ERP projects.

All you have to do now is plug the numbers into the simple ROI formula and see if the
answer is positive. ROI = (returns minus costs) divided by costs. Show the quotient
as a percentage. If it is positive, you have an expected gain and if it is negative, an
expected loss.

𝑩𝒆𝒏𝒆𝒇𝒊𝒕𝒔 − 𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕
𝑹𝑶𝑰 =
𝑰𝒏𝒗𝒆𝒔𝒕𝒎𝒆𝒏𝒕

Here’s where you find the information:

• “The “Investment” is the “Total New System’s 5-Year Costs,” which is the total from
the Summary of ERP Costs table above.

• “The “Benefits” is the “Total Project ERP Benefits” from the Summary of ERP
Benefits table above.

In most cases the benefit will be larger than the investment and you will end up with
a ratio, greater than 1. Multiply that ratio by 100 to get the ROI percentage that results
from upgrading your ERP system.

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ABOUT GIMASYS

Since being founded in 2004, with more than 16 years of experience, Gimasys
has become one of the leading companies in the field of providing digital
transformation solutions for businesses, as well as a reliable and prestigious
partner for information technology projects. With technological capabilities
recognized by customers nationwide, Gimasys is confident in the abilities of
providing powerful solutions and services, in order to support maximum
business growth.

Gimasys has established partnerships and become a leading provider of major

Technology Corporations in the world such as Oracle, Salesforce, Google,
Tableau, MuleSoft, AWS. With this close connection, Gimasys affirms that it
always catches up with the latest technology trends and is always ready to meet
the needs of business innovation.

Website: https://g-erp.co/

Head Office:

- Address: Floor 17th, Kim khi Thang Long Tower, No. 1 Luong Yen, Bach Dang

Ward, Hai Ba Trung Dist., Ha Noi

- Phone: (+84) 243 628 2267

- Email: bd@gimasys.com

HCMC Branch:

- Address: Floor 8th, Estar Tower, No. 147-149 Vo Van Tan, Ward 6, Dist. 3,
HCMC

- Phone: (+84) 28 7305 0186

- Email: bd@gimasys.com

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