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Posts Tagged ‘ROI in ERP’

avalara_roiAvalara is a company comprised of tax experts who deliver affordable, scalable sales tax solutions.  We often recommend them to clients, but our reason for posting today is a recent paper they published called “Is Your ERP Investment Paying Off” in which they proffer a few practical tips for measuring ROI in your ERP.  The full paper can be accessed here.

They point out that ERP is a major investment, so companies naturally want to justify the expense with better returns.  But while those companies pay close attention to costs and timelines, they often “fail to conduct any future value assessments on how their ERP impacts day-to-day operations.”

In fact, only about two-thirds of companies ever calculate that ROI according to a recent survey.  Avalara breaks it down simply, by noting that measuring ERP typically involves answering 3 key questions:

  • Where can I save money?
  • Where can I save time?
  • Where can I save resources?

Then they provide a few simple practices to follow to stay on track.  Their first 3 are worth noting, we thought, and we’ll share them today:

1. Make a compelling case. When you first implemented, you had support from key stakeholders.  When assessing ROI, stay the course.  Get buy-in from management, come prepared with your process defined, be specific about what you’re trying to accomplish and how it will impact the business.  And we would add: Find where improvements have been made, where they can be made, or where other companies have done so, and use those as a basis for extracting more compelling ROI going forward.

2. Take your ERP to task. In other words, where can you be performing better, and where can your system help you identify and correct the shortcomings?  Avalara’s examples include:

  • Minimize redundancy or improve transactional accuracy
  • Better integrate siloed business divisions into the process
  • Identify areas where the business could be more competitive
  • Comply more easily with tax rules and regulations

We suggest you start with measured baselines, so you can work on improving performance statistically from there.  It doesn’t have to be complicated at all.  In fact, keep it simple: seek out a very few key performance indicators (KPI’s – actionable and measurable) and use your system to monitor progress against them over time.

3. Drive towards specific goals. Avalara notes that most companies fall down in measuring ROI by being too general.  Like our KPI tracking tip above, be sure you’re measuring specific goals, and that you are not being unrealistic.  Here again, their examples make it easy to understand what you might look for in your own firm:

  • Fill orders faster
  • Shorten the time it takes to get invoices paid
  • Ensure accuracy of sales tax applied to purchases and invoices
  • Automate pricing updates and marketing promotions
  • Increase on-time shipments
  • Reduce product to market time

Prioritize your list, then focus on the areas where you expect the most, quickest bang for the buck.  Again, you’re keeping it simple.  After all, most of the best ideas and solutions usually are, aren’t they?

 

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When ERPAs we begin a brand new year it seems appropriate that a blog devoted to business, tech and ERP should “start with the end in mind” as we often say around here (stealing from Steven Covey).  When it comes to ERP, the key business question to ask of course is: Why?  And the answer should be: Money.  As in money saved, leveraged or otherwise brought to the advantage of the implementing firm.

So today we’ll take a look at some comments we came across lately in an article here entitled “When Will I See a Return on My Investment in ERP?” by Matt Lind of Archer Point.  We’ll highlight of a few of the areas where Matt believe companies can extract value and ROI from their ERP investment.

To begin with, Lind notes, pay attention during the early process of business analysis and workflow mapping.  During that process, companies frequently discover ways to improve inventory management.  While the goal during this time may be mapping your processes, Lind says that “scrutinizing procurement and warehousing can improve planning and control of inventory levels to reduce costs even before roll-out day.”

Sometime during rollout, or perhaps sooner, you should have a feel for how labor allocation is working within your organization.  This can help with labor forecasting, and in finding ways to reallocate or eliminate overtime, sometimes in the front office, sometimes in production.  For example, he notes that in manufacturing, it’s typical that indirect labor produces nearly half the cost savings because companies frequently don’t know how much indirect labor goes into their production.

A lot of features that are necessary but were previously expensive add-ons are now available immediately with today’s more modern ERP systems – another potential cost-saving source.  Web access, enhanced security, ad hoc inquiries and dashboards for making informed decisions (i.e., real-time data analysis) are fixtures of today’s systems that once would have added significantly to ERP costs.

Virtually always, companies find that the process of ERP implementation eliminates a lot of redundancy, repetitive entries and other forms of what we would call ‘administrative waste.’  Another area of potential savings can be in the reduced labor required for compliance efforts.  A CRM system integrated with your ERP will help manage pipelines, help with close ratios, increase salespeople’s efficiencies and improve your overall sales management – all leading to increasing top line opportunities.

With the more agile and extensive capabilities of today’s ERP systems, companies become more agile and less rigidly structured than what was required with previous, less robust systems.  As well, reduction of errors is a nearly universal benefit, along with the general sense of having more time to devote to the more important tasks, while the system manages the tedium that used to require more human input.

Lind also notes that Panorama Consulting recently estimated that the typical payback time for Microsoft Dynamics NAV is around two and a half years.  (SAP and Oracle tended to the 3+ year range.)  As Lind finally concludes in his article: “The large investment to purchase and implement an ERP system may seem daunting, but it is small compared to the return on investment that it will produce for years to come.”

And that, we find after 25 years of doing this, is why we continue to find new customers every year.

 

 

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roiOnce again, Eric Kimberling of Panorama Consulting has penned some good tips about achieving a fair return on investment on your ERP implementation.  In this case, he touts five ways to achieve it, and a post you can read here.

Kimberling starts by noting that most CEOs are so hung up about simply making sure their initiatives go live reasonably within budget and time that they sometimes miss the larger goal of ROI.  We’ll condense the gist of a recent post by Eric here for you today.

  1. Set the bar high for your ERP implementation. It’s okay to shoot for the stars. Rather than operating out of fear – whether it be fear of the project failing or fear of losing your job – try aiming for something even higher, such as delivering a set of business processes and related ERP functionality that will take your business to the next level. This mentality can and should affect every aspect of the project.
  2. Focus on people and processes, not technology. ERP vendors invest billions of dollars per year in R&D to make those cool bells and whistles, but at the end of the day, the success (or failure) of your project won’t have anything to do with these technical features. Instead, it will come down to how well you handle business process reengineering and organizational change management – the two most important success factors for any ERP implementation.
  3. Don’t underestimate the cost, time and effort required for your ERP implementation. While it is important to not become too focused on implementation time and duration, you also have to remember that you will never achieve your expected business benefits and ROI if you don’t make it through your ERP project alive. Setting realistic expectations early is the first step toward a ROI-driven and successful ERP implementation.
  4. Understand where the finish line really is. Successful ERP implementers know where the finish line really is. Most organizations go into their ERP implementations with the expectation that they are going to implement everything that their new ERP systems have to offer but, due to time and budget miscalculations, end up quitting the race early and never realizing that expected functionality.
  5. Focus on the long-term alignment between your business and your new ERP system. Successful organizations don’t ever really “end” their ERP implementations. Instead, they focus on ensuring that their businesses evolve over time.

We find Kimberling’s points above to be good standards for helping to ensure that clients achieve desired ROI and view their systems as a cog in their ongoing pursuit of continuous improvement.

 

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In our previous post we looked at two key ROI components when evaluating the implementation benefits of an ERP system in your business.  We created that post, and this, for the benefit of a particular client, but then we felt the information was worth sharing more widely.  Today we follow up with four more ROI areas to review when looking to cost justify an investment in ERP.

3. Morale matters.  The attitude, energy and satisfaction of the team (i.e., their ‘morale’) matters too.  While not a hard cost per se, consider the value of a team member whose job is made that much less tedious if ERP and a PC can relieve them of the worst parts of the job.  Tedious, repetitive typing and tracking fall into this ‘drudgery’ category.  While harder to quantify, the staff will tell you that there is value in making jobs more interesting, challenging and rewarding.

As a side note, ask yourself: Does your staff do a lot of grunt work in order to give the bosses what they want in the way of reports, information, etc.?  And is it possible that effort is not universally recognized or appreciated?  Do they know how hard it is for you to give them the information they need to run their business?  There’s a morale issue inherent in that consideration as well.

4.  Time counts.  Count time.  How much time does your staff spend chasing down details… following-up on orders… “expediting” (i.e., special-rushing orders, or following up with customers on “When’s my order gonna’ ship…” or, “We’re tracking that order now…”)?  Over time, as you gain better, more proactive control over your schedules, shipments, etc., you can start to diminish the time spent “catching up” to customers, or their complaints, their shipments and their issues.  If you count the hours spent in these completely non- (or even counter-) productive pursuits, you’ll realize not only considerable cost-savings, but also improved customer service.  “Expediting” should be the exception, not the rule.

5. Scattered silos of information.  The ability for all the right people to get the right information in timely fashion, on their own, is critical in fast-paced, high-growth environments (like yours?).  Consolidating critical business information needed to make the right business decisions – accessible to all – into the fewest possible containers (i.e., into a single ERP system), is a worthy and time-saving goal.  You want to strive for fewer disjointed, disparate spreadsheets and more centralized record keeping and sharing.  While more difficult to calculate, consider: What is the collective cost to the firm of having data spread across so many people, and not always available to those who need it?  ERP represents an investment in a strategic repository for all kinds of meaningful data that is meant to be shared across the organization.

6. Customer responsiveness.  While this benefit will come later in the implementation process, the ability to respond more quickly to client requests (single repository of information)… the ability for many people to have the same “view” of the customer record (CRM, accounting)… and perhaps farther down the road, the ability to create some kind of “customer portal” (for customers to check their own order status, for example) are all examples of potential customer service improvements.  They will not come right away, but rather gradually, over time, and with deeper investment in your system.  But all are possible, and the result should be an improvement to both customer service and to top line sales, in the long run.

 

We’ve presented in these two posts a few key areas to think about, and as best as possible, to try to quantify into labor-dollar-savings or efficiency improvements, as well as some thoughts about the value in customer service.  Your numbers will be unique to you, and will no doubt extend beyond the guidelines above.  Our tips are meant to be just a start, an aid to your own thought process about the deep and lasting value of process improvements and ROI.  Now it’s up to you.

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A recent conversation with a client looking to upgrade an old accounting system prompted us to make some suggestions about calculating the Return on Investment (ROI) that can be derived from a strategic investment in ERP.  Rightfully, our contact figured the next step after our process analysis would be to justify the entire investment to their owners.  She knew her task would be to quantify the benefits across their team.  In response, we proposed a few ideas of our own about how and where to look for ROI.  Since we think our advice is apropos in any similar situation, we are reprising our suggestions in our next two blog posts.  Part One follows…

Much, though not all, justification for an ERP system is often derived from its return on investment (ROI).  Following are some thoughts on the topic you’ll find useful.

1. Hard vs. Soft Costs. When quantifying cost savings, there are hard cost savings, and soft cost savings.  The hard savings are those in which costs are directly lowered and the bottom line directly impacted.  An example would be having 3 warehouse staff, and finding after system implementation that only 2 are required.  That one person, fully burdened for benefits, taxes, etc., might represent a hard cost savings of, say, $30,000 in a year.  (This assumes you actually let that person go.)  Multiply that by 3 years (a typical payback assumption), and you’ve recaptured $90,000 at the bottom line.

A soft cost saving occurs when you lighten someone’s load, but not their hours.  If it formerly took someone 4 hours a day to schedule production, and it now takes only 1, you’ve saved about 15 hours per week.  Do the math on that scheduler and you come up with some annual savings (say, $10,000), but… you don’t realize the savings unless you actually cut that person’s hours, or let them go – not likely.  Instead, you’ve more likely reassigned them to another task. 

When evaluating ROI then, while you might not count the 15 hours weekly savings, you should consider the added top (or bottom) line economic value of the new (and presumably more productive) tasks that person now performs: i.e., replacing what otherwise might have been a new part-time hire, or spending time on inside sales calls duties, or whatever works for you.  Their 15 hours saved per week might not drop to the bottom line, but the increase in sales they generate (or insert your own example here) might help the top line.

2. The little stuff adds up.  ERP systems save a lot of time previously wasted on redundant data entry.  Companies frequently double, triple or quadruple-enter data into disparate systems.  It’s important to add up the actual time abused this way.  Multiply those hours per day per person (across two or more people?), and apply a standard labor rate (plus insurance, taxes, etc. as a “burden”) and pretty soon you’re talking real money.  Saving just ten hours per week from two people adds up to three thousand hours over three years, and at even $10 or $15 fully burdened per hour, you’re talking tens of thousands of dollars slipping through the cracks.  So, look for the small stuff as well as the big, and do your own math.  But do it honestly, rigorously, and without bias.

In our next post, we’ll finish up, with 4 more areas that affect the ROI of ERP.  Stay tuned…

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