Enterprise resource planning (ERP software) is one of the most expensive technology initiatives an organization can undertake. While the payback can be large, most companies do not have a clear ERP budget defined or truly grasp the scope of possible business benefits until the ERP implementation is completed and the ERP software is in every day use.
Based on Panorama’s survey statistics, the average annual cost for companies implementing on-premise ERP packages is $6.2 million, and average business benefits realization is 37.2%. So what do these numbers mean to your business? As stated in Panorama Consulting Group’s 2010 ERP report, a well-defined business case is essential to provide a clear perspective on the key benefits that can be realized as a result of a new ERP implementation. Assuming the benefits defined by the business case are 100%; on average, companies can only achieve 37.2% of benefits after implementation. Image your company invests $6.2 million into your ERP project, would you be happy if you only achieve 37.2% of the benefits you expected? I don’t think that is something you want to see after putting forth so much effort on your ERP project.
Clearly, ERP benefits are by no means guaranteed and the return on investment of ERP software will be significantly impacted as a result. Based on our ROI model, you can see how much money you actually lose by achieving only 37.2% of business benefits.
In general, the total cost of an ERP system includes software costs, service costs and annual maintenance fees, which are typically about 20% of the cost of the software licenses. Based on these assumptions, when we consider an average cost of $6.2 million, an average payback period of 2.7 years, and average benefits realization of 37.2%, the model shows that the benefit loss from the ERP implementation is $4.3 million! Additionally, it takes you 2.7 years to recover these costs while it should have been only 10 months!
As noted in the 2010 ERP Vendor Analysis report, realized business benefits are independent from software selection satisfaction. Satisfaction with software selection is usually the result of a smooth evaluation process, while realized implementation benefits are based on the success of various other factors. Selecting a “perfect fit” ERP software package is only a start. Best-in-class enterprise software initiatives should also include comprehensive analytical tools and guidelines for the ERP implementation as well as effective organizational change management activities.
Read more about these and other ERP implementation metrics by reading one of our 2010 ERP reports.
Blog entry written by Haoyan Sun, Research Analyst at Panorama Consulting Group.