ERP Strategy: Move to maximize ROI in addition of minimizing TCO

The economic scenario is getting better and organizations once again are moving towards maximizing future growth instead of trying to sustain their existing business models. Once again, we are seeing plans for IT investments from select sectors especially in the field of ERP, which is considered as one of the driving engines for future growth and meeting needs of expansion plans. The latest industry downturn stamped the best practice that cost reduction is never an accomplished activity and it is a process that needs to be part of the continuous improvement program. In case of ERP, Enterprises were already focusing on reducing the cost of implementation & maintenance of their systems and reducing the TCO (Total cost of ownership) was one metrics that ranked highest on their priorities.

It is high time that the enterprises now shift to the next level and focus on more holistic picture of increasing the ROI (Return on Investment) instead of just focusing on reducing the TCO. While TCO takes care of just one part of the story which is cost, it leaves the rest of the part where organizations need to measure and realize both tangible and non tangible benefits of ERP. Typical ROI calculations will include the TCO part as the input and the benefits converted to dollars become the output.

To simplify, organizations need to consider ERP as another business (P&L account) which needs to payback the investment in certain period and then start churning profits for them.

As I said earlier, the ROI calculation will include the TCO part and data like:
  • How many more customers we can serve in same period
  • How many more products or services we can sell using the system
  • How can the system help me improve my margins (yes, it can)
  • How much reduction I see in my administration costs and inventory costs
  • By what amount I could reduce my working capital and
  • How transparent and compliant are my operations now…

The list is long and all of them are so important that if we do not measure these pre-decided key performance indicators after the ERP deployment (say after 6 months), we will not be able to realize the true benefits of ERP.

In-fact, to go a step further, the ROI calculation criteria should be discussed and agreed between business and IT teams before going for the actual ERP deployment because of 2 major reasons – one is that this will give a clearer picture of the measurable objectives of ERP deployment to business in all areas and the 2nd one is to have the success criteria clear to everybody and the same can be communicated to the consulting partners too so that everyone works for the same objectives in mind.

The above points are related more with the organizations that go for ERP implementation solutions but the same needs to be understood by the consulting or service provider organizations also. They too need to start thinking in these terms and rather than focusing alone on highlighting their capabilities on reducing the TCO of ERP while deploying or supporting it, they should go for highlighting and practicing ways to improve the ROI. This will truly become a partnership model of working between provider and customer and much better results can be achieved in all areas.

1 comment:

  1. Wonderful and resourceful article on how to simplify ERP solutions, this will also help in designing new web development in this direction. We would love to put this information on our website

    Thanks & Regards,

    Simplify Team


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