Costs and Benefits of an ERP Implementation When will you start
receiving Payback?

The Payback Principle

Do you diligently collect Payback points every time you shop at the supermarket, the drugstore or the gas station? So that you can later exchange them for cash, shopping vouchers or rewards?

The principle is quite simple: when you buy something from one of the participating retailers, you receive Payback points. In more general terms: you invest for a period of time and receive something in return at a later date.

ERP Implementation: a cost-benefit Analysis

The payback principle can also be applied to an ERP project. This is a very complex project that involves high initial investment. This initially puts many companies off. However, they usually decide to do so because they expect a “payback” in the future.

If you are also faced with the decision, calculate with future profit and performance increases as your processes become more efficient with the ERP system. At a certain point, this return will outweigh the high expenses you had to incur. The time you need to get to this point is the amortization period.

The Costs of an ERP Implementation

When planning your ERP project, various cost factors must be taken into account. This is where the Total Cost of Ownership (TCO) comes into play. These are the costs that are incurred over the entire life cycle of your ERP system. You need to calculate these costs.

What do these costs consist of? Firstly, there are external costs, including hardware, all services for selecting, adapting and implementing the ERP solution and software licenses.

There are also internal costs, i.e. personnel costs. After the implementation, only the ongoing costs are relevant for you. For example, software updates, support contracts and services that become necessary during the operation of the software. Be very careful to stick to your defined budget.

Total Cost of Ownership: On-premises vs. Cloud

When it comes to total cost of ownership, you should consider the differences between the on-premises and cloud operating models as early as possible in the decision-making process. This is because there are differences in terms of cost distribution.

With the on-Premises variant, you buy the software or corresponding licenses only once and conclude maintenance contracts with ERP vendors for future use. These lead to regularly recurring costs.

The cloud solution does not incur any such acquisition costs. There is a subscription model where monthly or annual fees are due. The responsibility for maintenance, updating and any repairs lies with the cloud provider.

SMEs in particular can benefit from a cloud solution because it is more cost-effective overall and can be flexibly adapted to their industry-specific requirements. In addition, future new purchases are no longer necessary as the software is automatically and continuously updated. When purchasing the software, on the other hand, these costs are incurred on a regular basis. Due to these differences, it is essential to consider the “on-premises vs. cloud question” in detail in advance.

The Benefits of an ERP Implementation - 5 Reasons why the Project pays off in the Long Term

In what specific ways do you benefit from an ERP implementation? Let’s take a look at the second important aspect of amortization: the benefits.

1. Increased company-wide Efficiency through Automation and seamless Integration

At their core, ERP systems always aim to automate your manual business processes. Thanks to automation, you can reduce your labor costs and increase the productivity of your employees in the long term. The centralization of your data also enables seamless integration For example, the ERP system Dynamics 365 Business Central and the business intelligence solution Power BI go hand in hand.

2. Optimized Inventories thanks to better Inventory Planning

A major advantage of ERP software is that you can plan your stock better. Have you regularly struggled with too little or too much stock in the past? Then an ERP solution can help you to better estimate your customers’ demand. As an ERP system creates transparency in all parts of your supply chain, you can determine the optimal quantity to avoid stock-outs and keep your stock costs low. Over time, you can realize significant cost savings.

3. Streamlined Production through real-time Data

An ERP solution can help you to streamline your production processes. Real-time ERP data is a necessary factor if you want to increase production efficiency. For example, other departments are informed directly about the loss of production capacity. Another example is the digitization of BOMs, which you can process and clearly display with the ERP software.

4. Better Customer Experience through Digitalization

Especially in times of digitalization and online retail, your customers are becoming more and more demanding. In order to compete with your competitors, you must be able to provide a good customer experience. An ERP system helps you do this.

Order processes are also simpler and more comprehensible for your customers, you can promise them delivery dates even more reliably and complaint procedures are also more straightforward. Emails with the subject “Where are our goods?” will then become a rarity. If your customers are satisfied, this in turn boosts your sales. Because satisfied customers are known to buy more.

5. Higher Motivation of your Employees

The fact that processes become less complicated with an ERP system not only has an effect on the satisfaction of your customers, but also on your employees. What is more motivating than flawless processes, good work results and stress-free collaboration with colleagues?

The transparency that an ERP system brings can also help to motivate your employees - provided you “take the wind out of the sails” of any initial uncertainty. And another thing: you can also make yourself more interesting for potential employees with a smart ERP system.

Communication ensures Acceptance: prioritize your Change Management

However, you can only take advantage of all these benefits if you create the right framework conditions in your company. If you want your investments to pay off in the long term, then your change management is the key.

Change Management: 10 Classic Myths
you should dispel

When planning your ERP implementation, you must ensure that all employees in your company are informed and involved in the decisions. Otherwise, in the worst-case scenario, they may rebel against the change that comes with the new system.

A change team can support you in tailoring communication to the individual employees and designing individual training for the users. In this way, your system will be positively received by everyone involved as they will be aware of how the system works and its benefits.

Determine the Payback Period of your ERP Implementation

A critical part of the ERP project is to get the approval of the management. Of course, they also want to know how long the payback is likely to take, so it is even more important to calculate the payback time as accurately as possible.

To determine the payback period of your ERP implementation, the first step is to calculate the total cost of ownership and then estimate the time it will take to realize the benefits equal to that amount. One concrete way to calculate the payback period is the discounted cash flow model.

We would be happy to help you define ERP costs and benefits that are realistic for your company.