Investment Security Part 2: Economic Efficiency

In the first part of our new blog series, we explored what your ERP system needs to offer to be future-proof and a solid investment. Before we dive into potential vendors for this demanding investment—and what exactly they must bring to the table—we’ll take a step back in this second part to look at how you can determine whether an ERP system will truly pay off for your company. We’ll show you how to evaluate whether there’s a risk of a bad investment and how you can prepare for the purchasing decision.

Naturally, the ERP software provider plays a key role before, during, and after implementation. But as the buyer, you should also take some important steps of your own. To assess the level of investment security, you first need to determine how economically viable a new ERP system would be for your business. While you may not arrive at a precise number, the closer and more accurately you can define the expected economic performance of the new system, the more successful your implementation will be—and the more impactful your company’s new digital core.

Ultimately, the profitability of ERP software can be evaluated using a classic formula: Economic efficiency = Benefit / Cost. Let’s take a closer look at each component of this equation in the context of ERP systems—and how you can estimate them as precisely as possible for your business.

Expenditure

Let’s now look at the expenditure factor in the equation mentioned above. When it comes to ERP systems, there is neither a fixed price point you can use as guidance nor an average complexity factor—these types of software solutions are simply too unique in their features and scope. That’s why we recommend preparing as thoroughly as possible to avoid unnecessary costs and unexpected price tags. One statistic may offer some reassurance: 75 percent of all ERP projects stay within budget.

Here is a list of factors you should include in your expenditure planning:

• Acquisition costs for software and potentially hardware: Understandably the most important and likely the largest expense. Note: A new ERP system often means more than just installing new software. Be sure to clarify with your provider what additional hardware and extra costs might be involved.
• Personnel costs: Implementation almost always requires additional staff. It’s better to budget generously here, both in terms of time and the human resources needed to support the rollout until full utilization is reached. Internal project managers who are reassigned from other duties and—depending on the size of your company and the system—external consultants can both be valuable resources.
• Time investment: While your project might not turn into another BER airport scenario, it’s best to be generous with your time estimates. In small businesses, an implementation can ideally take just a few months, but in large companies, it might stretch to fourteen or fifteen months. At a minimum, you should plan for at least six months.
• Delays: It’s wise to account for problems that might arise during implementation—especially during data migration. Unfortunately, various unforeseen issues must be considered as a factor. Not because of poor work or inadequate products, but because complex processes like this inevitably come with surprises, whether in interface issues, form setup, or data migration. While these risks can be minimized beforehand, they can’t be completely ruled out—so plan for some extra time and manpower as a buffer.
• Insufficient preparation: This is fully within your control. That’s why we emphasized in parts 1 and 2 of our blog the different ways you can prepare for ERP investment and implementation. About 20% of all ERP projects face challenges because requirements were not defined precisely enough, or the personnel effort was underestimated. So, before requesting a concrete project assessment, make sure your master data is well-organized.
• Internal effort: A smaller factor, but still relevant—usage and administration might require renovations, new furniture, training courses, etc. Discussions with all relevant levels and key stakeholders in your company will help better outline these internal efforts.
• Maintenance, support, and upgrades: Just as your shoes need occasional cleaning, inspection, and resoling, an ERP system requires regular maintenance. The more experienced your provider is, the better they can forecast necessary updates and releases—helping you to plan for them in terms of timing and cost.

Satisfaction Metrics

To get a clear picture of the impact an ERP system of this size and importance can have, it’s also helpful to create a table of so-called satisfaction metrics or values. List as many tasks as possible that are related to the software, and include a satisfaction scale from 1 to 6, for example. At different project milestones, your employees can record their satisfaction or dissatisfaction and quantify how their work and results have changed. This allows you to calculate and demonstrate the difference for each affected area.

Whether it’s project management, data maintenance, interface management, office tasks, support, or production—the satisfaction differences and progression (or, in the worst-case scenario, regression) can be measured in various ways. In other words, verifiable positive feedback—such as more efficient production staff, better-informed salespeople, more agile field agents, or IT personnel with a reduced workload—represents tangible value for your business.

Another useful assessment method is a kind of reverse scenario model. While you can only speculate in advance about potential missed opportunities, it’s worth considering: What would be different if there were no new future-proof system? On a positive note, criticism of ERP systems and their functionality has decreased in recent years. Today, over one-third of all users of modern ERP systems report being completely satisfied with the upgrade.

One more important consideration for your planning: the more deeply a software system is integrated into your processes—that is, the more departments are involved—the more worthwhile the investment becomes in the long run, and the more effective and future-proof the system will be.

Satisfaction Metrics

To gain the most accurate understanding of the impact a software investment of the size and importance of an ERP system can have, it is helpful to create a table of so-called satisfaction metrics or indicators. List as many tasks as possible that are related to the use of the software and add, for example, a satisfaction scale from 1 to 6. At various project milestones, your employees can record their satisfaction or dissatisfaction using these values and indicate how their work and results have changed. This makes it possible to calculate and display a delta value for each affected area.

Whether it concerns project management, data maintenance, interface management, office tasks, support, or production—the differences in satisfaction and the progression (or, in rare cases, regression) can be measured in various ways. In other words: verified positive reactions, such as more efficient production workers, better-informed sales representatives, more mobile field staff, or IT personnel with reduced workload, represent real value for your organization.

Another useful measurement is a kind of reverse-scenario model. While any potential loss of benefit can only be assumed or speculated on in advance, it’s worth considering: What would run differently if there were no forward-looking new system in place?

Encouragingly, criticism of ERP systems and their functionality has generally declined in recent years. Today, more than one-third of all users of modern ERP systems report being completely satisfied with the implementation.

And here’s another insight that’s important for your planning: the deeper you allow the software to penetrate your business processes—in other words, the more areas are involved—the more worthwhile the investment becomes over time, and the more effective and future-proof it will be.