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When a company purchases an ERP System, one question will definitely be asked: How long will it take us to recover our investment? It is a “must ask” question for CIO’s, CFO’s, and IT managers. An ERP system is a large capital expenditure that will consume a great deal of financial and personnel resources. Although functionality and implementation length are very important decision criteria, a short payback period and high ROI will help distinguish one ERP vendor from another. Payback period is defined as the length of time to recover the total project investment. This calculation begins at the start of the initial outlay of a ERP project. The most common way to determine payback period is through the discounted cash flow model, which takes into consideration total cost savings and realized benefits during the lifetime of the ERP system. Our 2010 ERP Vendor Analysis Report suggests that most completed ERP implementations have a payback period of about two to three years. [table “24” not found /]
According to Panorama’s study, the average payback period decreases significantly from Tier I ERP packages (3 years) to Tier III ERP solutions (1.7 years). While the difference between Tier I and Tier II ERP packages can partly be attributed to their complexity and number of ERP software users, it is not possible to ignore the large difference in paypack period between the various levels of ERP vendors and packages. Now that we know there is a clear different between the different tiers of ERP software, would it be fair to say that the payback period after go-live is about the same for each vendor within a given tier? [table “25” not found /]
When comparing the payback period of Oracle, SAP, Microsoft Dynamics, Epicor, and Infor, our research shows these five major ERP vendors all have similar payback periods ranging from 2.6 years to 3.2 years. Interestingly enough, the average payback period in the “Other” category it is only 1.8 years. While this data can provide the basis for many assumptions, one must be cautious. It is difficult to definitively conclude that Tier I and Tier II ERP implementations take longer to recover their implementation costs based on ERP software alone. The companies who tend to select Tier I or II ERP solutions may expect longer ERP implementations and high project costs, thus altering the project’s core foundation and leaning itself towards a longer payback period. While one might want to attribute longer payback periods solely to the ERP software and vendor, it is difficult to do so. It may be more realistic to suggest that Tier I and Tier II ERP projects take longer to recover their investment and while doing so, insert the caveat that some companies choose Tier I and Tier II ERP vendors slightly skew this data because they enter into the projects expecting them have longer implementation timeframes and higher project costs. Thus, allowing a variety of factors to lead to a longer payback period. When considering an ERP investment, what do you think is an acceptable payback period? [poll id=”21″] Blog entry written by Haoyan Sun, Research Analyst at Panorama Consulting Group.