What is the ROI and Payback Potential for an ERP System?

office with erp system

Imagine your company running more efficiently. The peace of mind and calmer days that can result from switching to an ERP system may be enough reason to justify the change.

When you switch to a new ERP system, you can feel fairly confident the project management software is going to save you time and a lot of headache through improved processes and better management of your door and hardware distribution, window and door manufacturing, commercial building materials, division 10 distributing, specialized commercial equipment or security company.

But when you want to get down to the nitty gritty and actually calculate the ROI of a new ERP system, things get a little more complicated. How can you know if the payback potential is worth the cost of switching to a new ERP system?

Industry experts estimate the typical time to see a return on investment on an ERP system is three years or less. Indeed, Panorama Consulting Group researched the ERP payback period of major ERP vendors, and found 2.7 years as the average time.

That’s a long time to wait for ROI when you’re dealing with ERP software that is not only costly, but involves a lengthy process of consulting, implementing, and training. How can you have confidence in the payback potential?

There’s no easy, sure calculation to figure out your return on investment when it comes to ERP, but by weighing the costs and benefits involved with your ERP project, you can get a solid idea — and confidence to move forward.

ERP Software Costs

This will be the easiest part of your ERP system ROI calculation. Look at the overall picture, and calculate the costs of moving to a new ERP system. These can include:

  • Consulting fees
  • License fees
  • Hardware costs
  • Maintenance fees
  • Training costs

Benefits of an ERP System

You already know your company will benefit from a more streamlined process, a smoother operation, better customer service, and more. But how do you calculate these expected benefits?

First, establish some baseline costs based on how your company operates now — before your ERP system is implemented. Then, compare your current situation to what you expect to see once the ERP system is in place.

Consider these factors:

  • Your Level of Productivity — In your current un-integrated system, you encounter data errors as departments are unable to accurately communicate, and real-time data is almost impossible to come by. What are those data errors costing you? Consider both the time and money wasted.
  • Visibility — In your current system, you likely don’t have access to real-time data. The right data probably doesn’t move to the right people very efficiently, which means decision making takes longer and isn’t always accurate. Moving to an ERP system will give you access to real-time data, which will give you greater financial control over your company.
  • Auditing and Compliance — How much are non-compliance fees currently costing you? In your current system, it’s likely you encounter non-compliance issues more often than you’d like — and many are probably easily removed once you move to an ERP system that helps you audit your processes much more efficiently. You’ll benefit from maintaining compliance requirements, and you can calculate the savings.
  • Forecasting and Managing — ERP systems can reduce inventory levels up to 22 percent. As you’re able to forecast your demand, you’ll limit overstocking. How much will you save by reducing overstocking?
  • Administrative Costs — ERP systems allow you to consolidate your financial reporting and several other administrative costs, which saves you money.
  • Customer Service — Are you wasting money fixing unhappy customers’ orders? Are you losing customers due to an unorganized process or unreliable shipments? With the benefits of an ERP system, how many customers can you retain?
  • Labor Costs — Better allocation of time and resources through an ERP system will reduce your labor costs.

Payback

Now that you’ve estimated your costs and benefits, determining your payback involves figuring out when that benefit will pay for the cost of switching to a new ERP system.

If your project is going to take several years to implement, expect your payback to be long in coming. Generally speaking, the shorter the deployment, the sooner you’ll see ROI.

Learn More About ERP Systems

What are your biggest challenges as a door and hardware distributor or window and door manufacturer? Growth, control, profitability, billing, or something else? Let ContractERP prepare a brief demo to show you how we can help you solve your biggest problems.