The ROI of ERP Systems: A Detailed Guide by Leading ERP Service Providers

ROI of ERP Systems | How to Calculate & Maximize ERP ROI

Modern enterprises today utilize smart technologies, and one such powerful technology is Enterprise Resource Planning (ERP) systems offered by leading ERP software providers and ERP service providers that help them stay competitive and agile, automate complex workflows and unify business processes, enable data-driven decisions, and achieve exponential growth. With professional ERP implementation services, many organizations experience notable improvements in their processes, productivity, and decision-making.

If you’re planning an ERP implementation either to integrate it into your existing operations or set up a whole new process, you must be financially prepared for the investment. Before implementation, it’s also essential to define clear ERP ROI metrics and ROI measurement parameters to assess long-term business impact effectively. Its benefits will only be visible after a few months. The real efforts and impact in terms of efficiency, productivity, and profitability will become clear within a year or two. That’s why understanding your ERP investment returns from the start helps ensure that your investment translates into measurable business value through effective ERP ROI calculation.

This step-by-step guide discusses what exactly the ROI of ERP is, how to calculate it, and how NOI Technologies can help you achieve the full potential of ERP solutions and essentially increase ROI.

Understanding the ROI of ERP Systems and Why It Matters for Every Business

The ROI analysis for ERP implementation measures the financial and operational gains your organization achieves compared to the total cost of ERP implementation. According to experienced ERP consulting companies, evaluating ERP ROI is a key step in ensuring system efficiency and sustainable returns.

The ability to calculate ERP ROI goes beyond a financial measurement; it works as a key tool that helps assess the viability and long-term value of investing in an ERP system. By understanding the ROI through accurate ERP ROI calculation, organizations can:

• Justify the cost of ERP execution to key stakeholders.
• Set quantifiable goals for system performance.
• Evaluate operational enhancement over time.
• Make informed decisions on upgrades or changes.

A well-planned ROI estimate is essential for enterprises as it serves as a valuable tool to justify implementation expenses, clearly specify the potential gains or expenses, and set realistic expectations for the project’s success.

How to Calculate the ROI of ERP Implementation (Step-by-Step)

Before executing a new ERP system, organizations should first build a detailed business case highlighting the potential value in contrast to the total costs, the project’s specific needs, anticipated benefits, and associated costs. A key element of this document is a detailed return on investment analysis. Companies can perform this deep analysis independently; however, partnering with expert ERP service providers or ERP consultants ensures a more accurate ROI assessment. However, it is advised that they tap into ERP consultants or the ERP service providers who have extensive knowledge, industry expertise, and understanding of various operational areas involving finance, planning, and manufacturing, and have firsthand experience from working with similar businesses that have undertaken ERP transformations.

Here is a step-by-step procedure to calculate the ROI for ERP implementations: 

Step 1: How to Calculate the Total Cost of ERP Implementation

The initial step to calculating the ROI of an ERP software is to figure out all associated costs, including both upfront and ongoing costs.  A comprehensive understanding of these expenses ensures an accurate ROI assessment. Key cost components include:

• Software Costs: These costs involve licensing, recurring subscription charges, the cost of implementation, and integration with existing systems.
• Essential Infrastructure Costs: These expenses involve hardware, networking, IT resources, and manpower required to support the installation and ongoing use of the ERP solution.
• Training Costs: The costs incurred for employee training are known as training costs. Companies arrange workshops, documentation, and hands-on sessions so their employees can learn how to effectively use the new ERP system.
• Ongoing Costs: These recurring costs such as support services, system maintenance, updates, and potential scaling requirements.
  

Many established ERP vendors provide scalable solutions to fit businesses of different sizes, and studies from PwC show how cloud ERP adoption shifts cost structure and drives faster ROI. NOI Technologies, one of the trusted ERP solution providers, delivers tailored ERP systems with complete cost analysis, including both pre- and ongoing costs. This approach sets the foundation for a reliable ERP ROI calculation formula that factors in both short- and long-term returns.

Step 2: Identify and Measure the Tangible Benefits of an ERP System

ERP systems drive measurable gains across every department, from operations to finance:

• Operational Speed: ERP systems automate and simplify complex processes and reduce human errors, ultimately reducing operational costs and improving overall productivity.
• Enhanced Data Accuracy, Smarter Decision Making: ERP systems centralize data, resulting in smarter, informed decision making.
• Minimize Inventory Costs: Real-time inventory visibility helps avoid overstocking and stockouts, encouraging smart inventory management and minimizing costs.
• Improved Productivity and Performance: By automating repetitive, intricate tasks, you can give more time to your employees so they can focus on value-driven tasks.

Step 3: Identify and Evaluate the Intangible Benefits of an ERP System

Intangible benefits play a crucial role, but they are not always easy to measure in evaluating the success of an ERP system. These may include:

• Fewer errors and rework, thanks to better data accuracy and transparency.
• Higher employee satisfaction through automated and improved workflows.
• Improved customer service levels with faster, more precise responses.
• Stronger regulatory compliance through better documentation and reporting.

Although these benefits may not directly impact financial gains, they contribute greatly to business revenues and growth. Though these benefits may not be directly measurable, they have a compounding effect, reducing turnover, increasing collaboration, and strengthening long-term profitability.

Step 4: Measure the Revenue Gains Achieved Through Your ERP System

The success of your ERP execution will have a considerable impact on revenues. It even impacts customer satisfaction levels, altering market demands and enabling valuable decisions for the company.

For instance, if your company sees a 10% increase in revenue in the year following ERP implementation, and other variables remain static, this growth can be one of the prime factors to consider during the ROI calculation. Many ERP service providers use similar benchmarks when projecting long-term financial impact.

Step 5: Measure the ERP Payback Period to Evaluate Investment Recovery

Understanding how to improve ERP ROI depends not only on the formula but on how organizations monitor gains post-implementation. The payback period is the time that the ERP system takes to recover your initial ERP investment costs through the benefits it delivers.

Payback Period Formula:

For example, if your ERP system costs you ₹200,000 and generates ₹100,000 in net annual benefits, your payback period would be 2 years. A shorter payback period typically indicates a more favorable investment.

Step 6: Apply the ERP ROI Formula to Calculate Overall Returns

After all costs and benefits (tangible and intangible) are identified and considered, you can calculate the ERP ROI using the standard formula:

ERP ROI Formula:

Take this example:

An ROI of 71.43% over five years shows that the ERP system recovered its full cost and delivered an additional 71% in value, which will be a worthwhile and profitable investment. A strong ERP investment generally yields a positive ROI above 50% within the first five years, depending on company size and industry.

Step 7: Optimize ERP Performance and Maximize ROI After Implementation

ROI tracking doesn’t end after implementation. To optimize ERP ROI long-term, businesses must continuously monitor key performance indicators (KPIs) and system performance.

• Regularly track KPIs to calculate the system’s impact on speed, revenue increase, and cost savings. Key metrics include order-to-cash time, inventory turnover, and revenue per employee.
• Optimize workflows that analyze areas where the ERP can further enhance operations or eliminate bottlenecks.
• Gain better control over operational costs by ensuring the system is being used effectively and unnecessary features or licenses are minimized.
• Leading ERP service providers also use this ROI framework to validate performance post-implementation.

Maximize returns from your ERP investment with NOI Technologies – Trusted ERP Service Providers

At NOI Technologies, we know that a successful ERP implementation begins with clear business requirements, workflows, and growth goals. This is where tailored ERP solutions become even more crucial, as these solutions help you achieve measurable ROI. Our Custom ERP software solutions are user-friendly, highly powerful, scalable, adaptable, and built for increased efficiency.

We also provide end-to-end implementation support, starting from planning, configuration, post-deployment support, and more, to ensure an effortless migration and long-term success. Our ERP solutions are engineered to deliver measurable returns—shorter payback periods, higher productivity, and improved operational accuracy.