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.
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 ERPnot 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
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).
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,"
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
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,
"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,
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
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
- 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
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?"
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
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
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,"
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
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
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 email@example.com
|Company: TEI Technologies Pvt. Ltd.
Modules: Distribution, manufacturing, finance, QMS
Time to implement: 70 days
Investment: Rs 30 Lakh
ROI period: Expected to be two years
Company: Pidilite Industries Ltd.
ERP: Orion (ICICI Infotech)
Modules: S&D, Finance, Purchase, Inventory, Tax
Time to implement: 12 months
Investment: Rs 50 Lakh
ROI period: 2 years
Company: Escorts Agri Machinery Group
ERP: Oracle E-Business Suite
Modules: Finance, discreet manufacturing, business intelligence
Time to implement: One year
Investment: Rs 4 crore
ROI period: Expected to be 3 years
Company: Godrej Industries Ltd.
Modules: Materials, manufacturing, costing, planning, distribution,
Time to implement: 30 months
Investment: Rs 13 Crore
ROI: Expected in 4-5 years
Company: Emerson Network Power (India)
Modules: Manufacturing, sales, inventory, finance, service, distribution
Time to implement: 6 months
Investment: Rs 1.5 Crore
ROI: 16 months
Company: Goodlass Nerolac Paints
ERP: SAP R/3 40B version
Modules: Sales & Distribution, Materials Management, Production
Planning, Quality Management, Plant Maintenance, Financial Accounting
& Management Accounting
Time to implement: 18 months
Investment: Rs 18 Crore