When you implement an ERP system, you naturally expect a return. This return is often in the form of increased profits and performance, through more efficient processes and smarter insights.
At a certain point, this return will counterbalance the money you spent on the project. The amount of time it takes to reach this point is known as the payback period.
Before you purchase ERP software, it’s important to estimate the timeframe of ERP implementation payback. So, let’s take a look at some of the factors that influence when and how you recoup the cost of project-related expenses.
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Understanding the True Cost of an ERP Implementation
There are many cost factors to consider as you plan your ERP project. While many organizations focus on the direct costs associated with the system, they forget to calculate the total cost of ownership. This encompasses both the solution itself, as well as the time and effort required to implement and maintain it.
Whether your dilemma is SAP vs Oracle or NetSuite vs QuickBooks, relying on numbers from your ERP vendor can leave you with a one-dimensional calculation. The hidden expenses beyond the technology itself include costs associated with:
- Internal resources
- Backfill resources
- External consultants
- License fees
- Hardware and infrastructure upgrades
- Organizational change management
- Business process reengineering
Your total cost of ownership will include the price of the platform, as well as the aforementioned services and resources. As you calculate your total cost, be sure to account for the unique complexities of your business, including the people and processes that will be affected by the change.
Understanding the Benefits of an ERP Implementation
Now that we’ve covered some of the costs associated with an ERP implementation, let’s take a look at the other component of ERP implementation payback: the benefits.
1. Better Inventory Planning
A major benefit of ERP software, especially supply chain management systems, is improved inventory planning. If you’ve been challenged by under-stocking or overstocking in the past, an ERP platform can help you better anticipate customer demand. With improved visibility into every facet of your supply chain, you can determine the exact amount you need on hand to avoid stockouts, while keeping your warehouse overhead low.
Over time, this can deliver impressive cost savings. It can also save your brand reputation and improve your customer service, which can also boost sales.
2. Streamlined Production
ERP software can help streamline your production processes. In other words, ERP real-time data is essential if you want to increase the efficiency of production.
When data is more visible and reliable, employees are empowered to make smart decisions that contribute to the efficiency of your operations.
3. Lower Operational Costs
While there are many types of ERP systems, one thing is clear: these systems are designed to automate manual business processes. This automation allows you to minimize shortages, lower labor costs, and bolster productivity.
Note: This is only true if you optimize and standardize your processes prior to automating them.
Understanding ERP Implementation Payback Period
Achieving executive buy-in is a critical but difficult part of an ERP system implementation. C-suite leaders all want to know the same thing: What is the expected payback period?
It’s an understandable question. An ERP investment is a major capital expenditure and will require significant money and resources.
As mentioned earlier, payback period refers to the total amount of time it takes to recover the full project investment.
One way to calculate this is by using the discounted cash flow model. This model considers the total cost savings and benefits you expect to realize throughout the lifespan of your ERP solution.
Don’t Forget Change Management
We’ve always said it: A great ERP system isn’t great if no one is using it. In other words, if you want to realize payback on your investment (even if it’s one of the top ERP systems), then organizational change management is key.
Whether you’re planning an ERP implementation or an SCM implementation, it’s important to ensure that every person in your organization is informed and has a voice.
From personalizing communication to customizing end-user training, a dedicated change management team can help oversee this effort. This way, once your system is ready to go live, everyone is enthusiastic to embrace it because they’re up to speed on how it works and what benefits it will provide.
Reap the Benefits of Your ERP Investment
Put simply, determining ERP implementation payback period involves calculating your total cost of ownership, then estimating the time it will take to realize benefits equal to that amount.
Our team of ERP consultants can help you set realistic expectations for both ERP costs and benefits, so you can provide your boss with the information they’re seeking. Contact us below for a free consultation.
