ROI on ERP
In our current situation, businesses that invested in ERP systems are seeing really excellent ROI, says Deirdre Fryer, Head of Solutions for Africa at SYSPRO.
Return on investment – or ROI – on enterprise resource planning software can be measured in a variety of ways. Each business has a very different requirement of what they hope to get out of an ERP system.
If we look at the lockdown scenario in which we currently find ourselves, says Deirdre Fryer, Head of Solutions for Africa at SYSPRO, for some businesses it all comes down to having the right stock at the right place at the right time.
Whereas previously, overstocking was an issue in that it tied up cashflow, today every supplier to an essential services industry around the world would prefer to be overstocked. On the opposite side of the coin, other non-essential services companies would rather go into lockdown with as lean an inventory stockholding as possible, as that means less constraint on the business.
Businesses that have an ERP system in place are able to run different models and look at the business holistically, reviewing their inventory holding, cashflow and debt, and see the overall state of the business and how to plan or potentially shift their business models for a particular timeframe – such as over the lockdown period. “This is where ERP systems really hold their value,” says Fryer. “When you don’t have a system in place, it makes it a lot harder to plan and respond quickly in challenging times.
“When all of a company’s data is in an ERP system, the business has the ability to be dynamic and can start implementing interim measures to accommodate changes in the environment. This is a lot more difficult when the business data is residing outside of a system.”
And this is where the ROI on ERP is being seen currently, says Fryer. “When you talk about a return on investment it implies that ERP is a once-off investment. You buy it, install it and see your return. That’s not accurate, though, because implementing ERP is a journey, it should be evolving continuously with your business. You have to consider your initial ROI as well as your long-term total cost of ownership (TCO).”
She explains: “A business buys and pays for an ERP, implements it and, within six to 12 months, starts seeing a ROI. However, that ROI keeps evolving and the business must look at the TCO over the ensuing years as some ERPs might cost more over time than others, depending on how flexible and customisable they are.”
There are two aspects to measuring ROI on ERP. Are you measuring the initial return or the return over the next three to five years? And what does that look like from a business total cost of ownership point of view? Fryer poses the following comparison: Consider two ERP products that cost exactly the same, including implementation. With Product A, you pay upfront, while Product B has milestone payments with a final payment after implementation. Both products are purchased, implemented and go into maintenance mode.
Initially, Product B is going to have a better ROI from a cashflow perspective as the investment is spread over several months. However, Product B is going to require a fair amount of development to evolve it and keep it current over time, which means the business will need to hire people or retain contractors to maintain it going forward.
Product A, on the other hand, is customisable and flexible, which means the business can own it without investing in resources to keep it going. This means the long-term TCO is better than that of Product B, which has a more expensive long-term TCO. “That’s where challenge around measuring ROI resides,” says Fryer. “It’s variable depending on how you approach it and measure it.”
However, she goes on to point out that ROI goes beyond financial gain. Companies install ERP systems to solve specific business problems. For some it might be managing their financials better, getting visibility into their debtors and creditors, improving their cash-to-cash cycle and getting more insight into the business’s cash flow. The ROI for these types of challenges can be quantified quite well, says Fryer. “It’s pretty much the value of the system versus what the improvement looks like. Within six months of going live, the business should see a reduction in its cash-to-cash cycle. Of course, the value to the business depends on whether it’s a million rand business or a billion rand business. If you’re reducing the cash cycle by 15%, depending on value of the business, that number is quite different.”
Companies generally see the biggest ROI from a supply chain improvement perspective. “Companies want to be sure that they’re spending their capital in the right place at the right time and on the right type and quantity of stock. It’s essential to have stock to sell, but you don’t want to overstock as that ties up capital that could be used elsewhere in the business. This is an area that the majority of businesses focus on when looking at ROI on their ERP. Significantly improving inventory management can effect a capital saving, which means a better cashflow return for the organisation.”
Nowhere is this more evident than during the situation that South Africa – and indeed the world – finds itself in currently. Retailers and their suppliers have shown they can be flexible and respond quickly and they would never have achieved that without ERP systems in place. Systems are coming to the fore in times of crisis, and their true ROI comes from being able to respond quickly and flexibly to situations like this.