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How to evaluate the ROI (return on investment) of an ERP system

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Investing in an ERP (Enterprise Resource Planning) system is a major strategic decision for an organisation, aimed at raising efficiency and integrating operations. A correct and comprehensive evaluation of the ROI (Return on Investment) is therefore essential to confirm that the investment is worthwhile and aligned with business goals.

1. Understanding the basics of ROI

ROI is a ratio used to measure the worth of an investment by comparing the benefits received against the cost incurred. The basic formula used to calculate it is:

ROI (%) = ((net benefits received – total cost) / total cost) × 100

The higher the ROI, the greater the worth and the better the return from that investment.

2. Identifying and calculating “Total Cost”

Calculating the total cost of adopting an ERP system must take into account both direct and indirect expenses over a defined period (e.g. 3–5 years), including:

  • Software Costs:

    • Licence or subscription fees
    • Customisation and add-on development

  • Implementation Costs:

    • Consulting/implementation service fees
    • Data migration costs
    • Employee training costs

  • Hardware & Infrastructure Costs:

    • Server and network costs (for On-Premise systems) or cloud service fees (for Cloud ERP systems)

  • Ongoing/Operating Costs:

    • Annual maintenance fees and support
    • IT staffing costs to look after the new system

3. Identifying and calculating “Benefits”

The benefits gained from an ERP system can be divided into two main types, and you must clearly collect comparative data before and after using the system:

3.1. Tangible Benefits

These are benefits that can be measured and valued in monetary terms directly, and are a key factor in calculating ROI.

  • Cost Reductions:

    • Reduced labour costs: less time spent on redundant work or manual data entry
    • Reduced inventory levels: more efficient material and inventory planning reduces holding costs and obsolescence
    • Reduced procurement costs: consolidating purchasing power and better supplier management
    • Reduced errors: lower costs arising from mistakes in production, shipping, or accounting

  • Revenue Increases:

    • Better on-time delivery
    • Faster and more efficient customer service, leading to customer retention and additional sales opportunities
    • Better sales data analysis, leading to better pricing and marketing decisions

3.2. Intangible Benefits

These are benefits that cannot easily be converted into monetary value, but are important to the organisation’s growth and stability.

  • Real-time data access: Helps executives decide faster and more accurately
  • Data integration: Data is consistent across the whole organisation (Single Source of Truth)
  • Compliance: Helps operations conform to legal and control standards
  • Customer and employee satisfaction: Smoother working improves employee morale and delivers better service to customers

4. Steps to evaluate the ROI of an ERP system

  1. Define clear success metrics (KPIs): Before the project starts, define what the ERP system must improve and use measurable metrics, such as:

    • Reducing month-end closing time
    • Reducing the order error rate
    • Increasing inventory accuracy
    • Increasing production throughput

  2. Collect baseline data: Record all the KPIs before installing the ERP system to use as a basis for comparison.

  3. Calculate the cost (TCO): Gather and estimate all costs as identified in section 2.

  4. Calculate the tangible benefits: Assess the monetary value of savings and increased revenue against the expected metrics — for example, if you expect to cut working time by 10%, calculate that as the value of salaries saved.

  5. Calculate ROI and the payback period: Use the ROI formula above, and calculate the time it will take to recoup the investment (the point at which cumulative benefits equal cumulative costs).

  6. Consider the indirect returns: Bring the intangible benefits into the decision to get a fuller picture of the overall worth.

Conclusion

Evaluating the ROI of an ERP system is not merely a number-crunching exercise — it is a key tool that helps an organisation build a strong business case before investing, and track performance after going live, to ensure that the chosen ERP system is genuinely “a system that delivers results aligned with business goals.”

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