ERP ROI Analysis
Calculating An Accurate Return on Investment for Enterprise Software
In recent decades, the approach to justifying the purchase of enterprise software – including manufacturing ERP solutions – has undergone three major changes.
First Wave: Repair, Replace, Recess
In the run-up to Y2K, huge software investments were justified almost entirely on the basis of risk avoidance. Stockholders and stakeholders were regaled with stories about elevators stopping between floors, life-saving pharmaceuticals failing to ship, nuclear power plants going offline, and oil refineries exploding into the midnight sky. Yes, everything within 10 miles of a computer was in grave danger when the clock crossed midnight.
So much money was thrown at ERP repair or replacement projects in 1999 that it triggered a software recession in 2000-2002 as companies large and small struggled to digest those mega-projects.
Second Wave: Invest, Catalyze, Mislead
Meanwhile, new startups like Ebay, Amazon.com, Netscape, and Google began to usher in the second wave based on enabling E-commerce over the Internet. And as in the Y2K era, companies “had no option” but to participate in the next wave of software investment lest they be left behind by smaller and more agile competitors.
But this time, Boards of Directors, burned by budget overruns in the CIO suite, demanded detailed financial projections and ROI analysis. Unfortunately, the ROI forecasts used “rosy scenarios” based on revenue growth that surely would materialize from “frictionless E-commerce” and cost reductions that would result from “disintermediating the supply chain.”
Now, nearly two decades later, there are innumerable examples of companies riding a wave of software investment to industry leadership positions, while another group rode those same investments into bankruptcy, or worse.
So, how do we square that circle?
Third Wave: Plan, Execute, Measure
In retrospect, we now know what was missing in the second wave; the processes and innovations that were expected to produce the forecasted benefits were promptly ignored once the projects were approved and launched. What is needed is a third wave: a holistic approach to project management whereby these processes and innovations become part of the project task plan, to be scheduled, executed, managed, and measured against the forecast.
An oft-cited publication by Dan Ariely in the June 2010 Edition of Harvard Business Review stated that “Human beings adjust behavior based on the metrics they’re held against. Anything you measure will impel a person to optimize his score on that metric. What you measure is what you’ll get.”
So, if ROI is an important objective of capital investments in Enterprise Software, make its measurement and achievement an integral part of the project plan.
RenaissanceTech: Your Experienced Manufacturing ERP Experts
RenaissanceTech Consultants average ten years of experience in the design, deployment, and management of ERP and Configure Price Quote (CPQ) projects for discrete manufacturers in a wide array of industry sectors, including:
- Construction & Mining Equipment
- Architectural & Building Products
- Boats, Yachts & Marine Equipment
- Furniture & Fixtures
- High-Tech & Instrumentation
- Promotional Products & Specialty Apparel
- Pumps, Compressors & HVAC-R
- Specialty Vehicles