Making ROI on ERP happen

It is important to understand that ROI comes from the process improvements supported by ERP—not from ERP software alone. by Brian Pereira

When an enterprise invests a huge sum in a piece of infrastructure, it expects to recover the investment within a finite period. And in these cases, the Return on Investment (ROI) matter is discussed right at the beginning, when the management is approached for funds.

Tariq Farooqui, Country Manager, JD Edwards India (a PeopleSoft company).

Since ERP software is also considered an infrastructure investment, it is natural to expect financial returns. Most organizations deploy ERP, and sit back to wait for returns. And when returns fail to come in, the ERP is regarded as a failure. It is important to understand that ROI comes from the process improvements supported by ERP—not from ERP software alone.

Post-ERP, if your business processes continue to be the same as in the pre-ERP days, there won't be any improvements.

ERP software can introduce new processes that can bring about performance improvements, but it is for the organization to decide which processes it wants to accept.

"ROI does not come from ERP. ROI comes from what you do using ERP. ERP is a tool and it all depends on how well you use this tool. There are organizations that have got substantial benefits, which are many times their investment. And there are organizations that have not got the desired benefits," said Ravi Kathuria, General Manager, Enterprise Solutions, Baan Info Systems India.

How ROI comes

Sanjay Agarwala, Director, Eastern Software Systems (ESS)

For achieving ROI it is also important to identify the business processes that can undergo change and then select the appropriate ERP package. While doing so, one must also choose the most appropriate modules.

"Significant increase in ROI can be achieved if the software application is appropriate to the needs of the organization. In the long term, an application that is flexible, and can adapt to changing business requirement, will reduce the cost of change and increase the ROI," said Tariq Farooqui, Country Manager, JD Edwards India (a PeopleSoft company).

MEASURING ROI

Once ERP has been implemented there is a stabilization phase, which typically lasts between six months and a year. After that, organizations will try to calculate ROI in definite terms. But many are not able to quantify ROI on ERP for certain reasons.

"I believe that today organizations are not able to quantify their ROI from ERP implementation because at the beginning of the project the KPIs (Key Performance Indicators) and measurement criteria were not defined; this makes it difficult to quantify the ROI at a later date," said Farooqui.

Mani Mulki, General Manager-Information Systems, Godrej Industries agrees. He said companies fail to realize the ROI as they think about it only after implementing ERP.

"There are certain business metrics that need to be considered well in advance. This could be inventory levels, number of days for customer outstandings, the type of reports, the number of people in a particular function etc."

Mulki said they would think about improving these metrics right at the beginning. "For instance if outstandings were X number of days, we planned to reduce it by 50 percent within two years. This can be done with ERP."

Dhruv Chadha, Enterprise Solutions-Marketing, Infosys Technologies said it is very difficult to measure the returns, given that these are not visible immediately.

"ERP implementation changes the existing business processes in favor of ones that are streamlined to the best ones followed in the industry. It changes the way business is done. The work profile at the end user level also changes. The productivity gains resulting both from improved processes and integration of financial, business and transaction data are huge."

Although many people say it is difficult to measure ROI, there are tools, models and methodologies for actually doing this.

TEI Technologies uses CER Audit to calculate ROI. "When we seek capital we need to have an approval in the justification. The finance department has to go back and do an audit to justify an investment. So we have put a payback period of two years in the CER," said Sethumadhavan I, CEO, TEI Technologies.

"The best thing to do is to identify the objective or purpose of ERP before implementation, and then compare the achieved benefits to those desired," said Ravi Kathuria of Baan Info Systems India.

Geet Lulla, Industry Head, Discrete Manufacturing, SAP India

To help measure ROI, JD Edwards (a PeopleSoft company) offers a Value Assessment Process for setting the benchmarks, and than monitoring the implementation, to work towards achieving those benchmarks, and measuring them.

An industry consultant says while most vendors have been able to construct comprehensive ROI models for their products, these models largely fall short in their ability to accurately measure the total value of an enterprise software investment.

This is due to the fact that most ROI models are focused on quantifiable measures of return. While this is a useful and often necessary function, the focus on purely quantifiable measures leaves little room for a discussion of more qualitative success factors that are often difficult to fit into a fixed economic model.

"ROI models don't necessary apply to a large extent because a lot of these are not necessarily quantifiable," said Arun Gupta, Senior Director, Business Technology, Pfizer.

QUALITATIVE OR QUANTITATIVE?

ERP software by itself offers many inherent benefits. But the question is whether those benefits are qualitative or quantitative.

"A more complete analysis of return can be made by looking at the overall payback that enterprise software can offer to a company. Enterprise software payback includes not only quantifiable improvements in bottom and top line functionality, but also more qualitative measures like new business opportunities, improved customer and partner relations, and improved time to market. These contribute significantly to the success of a company's enterprise software implementation and use," said Prashant Karkhanis, Global Head-Business Consulting at Mahindra Consulting.

It needs to be understood that ERP is not a driver but an enabler to business. All expected benefits couldn't be achieved unless business owners are committed to it. Hence one can achieve ROI provided:

• KPIs are identified and targets are decided and agreed upon by all process owners.
• Necessary business initiatives are in place to achieve these targets.
• ERP, other than the day to day business transaction, is also aligned to perform and measure these initiatives to give the necessary feedback to the business.

In short, the right collaboration of business and ERP will certainly help business to meet its targets and achieve planned ROI.

Sanjay Agarwala, Director, Eastern Software Systems (ESS), said ROI from an ERP implementation is mostly qualitative in terms of better response time to the market, improved funds and cash flows, reduced inventory levels, and more efficient utilization of existing staff. "Quantitative measures are possible if the implementing organization has adequate historical data about the above parameters, which can be later compared to the post-ERP scenario."

Geet Lulla, Industry Head, Discrete Manufacturing, SAP India said people know that ERP will provide qualitative benefits. "The issue that people tend to think about more is on recovering the investment. The question is how does one measure the returns in rupee terms?"

ACTUAL BENEFITS

Most of the user companies that we spoke to talked more about process improvements rather than financial returns. Controlling costs and speeding up order fulfillment (customer delivery) was the main focus. The key to doing this is keeping inventory levels within control and maintaining accurate information (about aspects like orders and raw materials) at all times. Here are some examples of how companies are enjoying certain tangible and intangible benefits.

SBS Grover, Senior Director for E-business, Oracle India informs us that ERP has helped Kirloskar Oil Engine bring down the order registration time from 15 days to one day.

"At Indian Aluminum Company (INDAL) the customer resolution time was brought down by 65 days. At BOSCO the budgeting used to take 110 days, and they brought it down to 30 days. In the same company, the sales lead time was brought down from 60 to 15 days. The delivery time was brought down from 30 to seven days," he said.

Zoeb Adenwala, Chief IT, Pidilite Industries said ERP has improved customer service, reduced working capital, standardized processes, reduced inventory, and provided a centralized set up from the previous distributed model.

Sethumadhavan I (TEI Electronics) said, "After implementing ERP we have better control over inventory and are able to meet customer expectations. The errors in the manual system have been eliminated and the duplication of accounting has been avoided."

Ajay Seth, CIO, Escorts Agri Machinery Group said, "I think service levels have improved tremendously across the organization. There is visibility of online data, so top management, middle managements and senior executives can all access the data. Previously this was performed in batch mode and getting updated information used to take a lot of time, and MIS reports used to be created a month late. Now you can take on-the-spot decisions."

Seth also said that there is much better working capital management in his organization now. This was due to better visibility on the inventory, creditors, and debtors, which enabled the company to better manage cash flows. "We have also removed a lot of non-value adding activities," he added.

Jason Gonsalves, General Manager, IT & Costing, Goodlass Nerolac Paints, said they have not really got down to calculating ROI in financial terms. But he is happy to note other benefits that ERP has brought in.

He explains, "With ERP we can drill down to any level of detail. This helps us in setting better policies and improvement plans for the organization. We can remove inefficiencies in the organization. Due to all these changes, we were able to implement a Balance Scorecard." A Balance Scorecard is a performance benchmark used to track corporate performance.

IT'S HOW YOU USE IT

Enterprises like these have indeed been able to improve their top and bottom lines thanks to the process improvements and the shorter cycles in the stages of order fulfillment. And this has all been possible due to ERP.

As we said earlier, ERP by itself does not promise returns. The manner in which you use this tool to streamline your business processes, is what gets the returns. Now whoever said, "ERP is dead" or "ERP does not offer returns" could do well by taking take back their words!

Brian Pereira can be reached at brianp@networkmagazineindia.com