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How to conduct a cost-benefit analysis for an ERP system

When you think of buying or hiring an ERP system then you should make a cost-benefit analysis. When properly done it will protect you from acquiring a system that would lose money instead of earning it.

The costs of an ERP system

The costs of an ERP system consist of many elements:

  • The acquisition price. That is the money you pay when you buy a system. Sometimes you cannot buy a system but you can hire it for a monthly fee.
  • The costs of customizing the system. An ERP system can be used in different ways. The supplier changes the settings of the system in such a way that it suits your company’s operation. This can be a time consuming job. It requires not only the efforts of one or more consultants of the supplier but also the cooperation of some of those members of your staff who have an excellent knowledge of the way the company operates.
  • The system has to be installed on your computer-system. The supplier will do that in most cases, but at a price. It may be that your computer system has to be enlarged, more memory, more data storage, more workstations, perhaps a new operating system. If so, it is you who pays the bill. (If you are offered an online ERP service, you will get a very different cost structure).
  • The system must be tested technically and functionally after installation. The supplier will do that, but the participation of some of your staff will be required.
  • Your staff must be trained to use the system.
  • Perhaps you are obliged to change some working procedures. That is far easier and cheaper than overhauling the system. Try to avoid even minor software changes.
  • The actual transition to the new system can result in extra costs. Conversion of files, phasing out the old system and the like.
  • A maintenance contract is often obligatory.
  • Make an allowance for unforeseen costs.

Quantify all these costs and transform them into total monthly costs.

A word of caution: suppliers are sometimes inclined to be vague about the total costs of an item, for instance the costs of training. ‘It depends on the ability of your staff to learn new things’, they will say. Or: ‘customizing is not easy because your company has its unique way of doing things’. Do not accept any vagueness about costs. Insist on a clear and complete offer, without loose ends. You will pay dearly for it if you don’t.

The benefits of implementing an ERP

Don’t get gloomy reading through the previous section on costs – there are certainly benefits to installing an ERP system and they can be very considerable:

  • When properly customized an ERP can make the procedures of your company much leaner and streamlined by eliminating re-work and manual handling, thus reducing labour costs.
  • In a manufacturing environment a just-in-time delivery policy can be realized, reducing the need for keeping stock. This will free up capital for other use and the costs of stock keeping will decrease.
  • An ERP system, with some built-in intelligence (rule-based procedures) can increase the reliability of your company considerably and can help you with creating loyal clients. You also will be an attractive partner for other players in your field of business. Remember that it costs less to retain an existing customer than to acquire a new one.
  • Superior intelligence and more automated processes may reduce your reliance on expensive skilled workers, reducing labour costs through the use of lower-cost workers.
  • A good working ERP system increases your company’s capability to keep up with a strong growth of the business. This reduces the need for extra office manpower when indeed a strong growth occurs, and enables you to capture significant new revenue opportunities.

Quantify the benefits and transform them into total monthly benefits.

Another word of caution: be conservative and prudent with estimating the value of the future benefits. Overly optimistic benefits may prove elusive during implementation.

Now you can easily compare the total monthly costs with the total monthly benefits and the outcome will soundly underpin your decision.

ERP Buyers Guide