In a recent webinar, we covered eight steps to take in preparing your organization for an ERP project and overall ERP readiness. Among other questions and concerns covered in that webinar – such as the right timing for ERP, handling the demands of the project, and being successful with a new system – the question of justifying in ERP was considered and briefly discussed.
As a follow-up to the ‘8 Steps to Preparation’ webinar, our ‘5 Steps to Justify Your Investment in ERP’ webinar focused exclusively on the question of justification, and on necessary steps to show the compelling reasons for ERP in your organization. Making a case for ERP involves looking at your organization from end-to-end to construct a complete business case investing in ERP. There are questions of business practices and processes as well as finances to consider, and the five steps reflect all of this:
Assess your internal environment
This is the first place to start: examine the resources and knowledge that is available in your company. You want to know if the people around you, those who would be designated to lead and participate in the project, are following the five criteria or characteristics:
- Expertise to build the business justification
- Time to spend justifying the business need
- Credibility with company executives
- Ability to coordinate with line-of-business executives for consensus
- Experience with and knowledge of industry best practices
If you don’t have personnel that have recent ERP experience, you should work with a consultant that has experience, preferably in your specific industry vertical.
Fully document your current state
The goal during this step is to identify how your company operates its processes today. By documenting your business challenges and the opportunities for improvement, your case can be better made for investing in ERP. Looking at and documenting your current state is going to help your team get a full understanding of where improvements can be made, and where those waste and non-value activities exist.
Clearly map your future state
This is where your team gets a clear handle on your improved processes, the savings or efficiencies that come from those improvements, and the ensuing potential gains in revenue. The output from the future state mapping is detailed process maps and a definition for each map for multiple levels in your business: a map for your enterprise, and multiple maps that account for your departments, department processes, and all sub-processes within.
As your team develops these maps, you must determine if the process can be implemented with your current technology, or if you need new technology. If you need new technology, create a map that becomes the input to the requirements for that system, and also serves the design phase during the implementation. The improvements we’ve seen from ERP when future state mapping has been used, includes savings such as: reductions in inventory, lower cycle times, waste, and labor cost, improvement in sales and revenue, and improved CRM system response.
Get a handle on total costs of upgrade or new ERP
Common ERP project costs are going to include:
- Cost of expansion
- Deployment options
Additionally, there is the administration and maintenance of your current ERP or the systems, software and hardware you are choosing to employ for your business. You need to maintain all of that and, over time, your maintenance costs will rise with things like high annual fees, upgrades, and additional customizations. Also knowing your deployment options – on-premise, SaaS, virtual private network or true cloud – and what works best with your organization will go a long way in helping you get a handle on costs.
Accurately calculate your ROI
Calculating meaningful ROI measurements is a challenge for most small to medium sized manufacturers and distributors, mainly because the costs of the new or upgraded ERP system are easy to identify, while the savings in hard dollars is more difficult.
This is no surprise – most organizations are running full steam in managing operations, production, supply chain, ordering, inventory and other areas. But taking the time to calculate those metrics that factor into the “return” part of ROI often involve effort in analyzing indirect savings. Of course these typically do not appear on the bottom line, but instead these indirect benefits can still be quantified through looking at your business processes.
We’ve seen that the best performing companies take the time and effort to track both direct and indirect benefits as part of ROI calculations. These companies keep front and center the annual total savings they achieve since implementation.
Justification for investing in ERP involves much more than the cost of the system. The case you make for allocating resources to your ERP project – funds, time, personnel, equipment, to name just a few – has a direct correlation to the overall effectiveness and success of your project.
The “5 Steps to Justify Your Investment in ERP” webinar is available – at your convenience and at no cost – through our On-Demand Webinars page.