How to Calculate an ROI for Your ERP Consultant
Defining a set of accurate Return On Investment (ROI) metrics regarding the engagement of an ERP consultant can be a somewhat difficult path to tread. This is especially the case when approaching the task without understanding the constellation of ‘all-in’ business elements that lead to a final financial value.
any successful enterprise or divisional business formula comes down to a question of hard/soft costs versus total resultant value
It should be noted at the outset, however, that with the exception of senior or C-level financial managers within an enterprise, most line resources managers don’t typically take the time to clearly comprehend the impact of ERP consultants on enterprise ROI. At the end of the day, any successful enterprise or divisional business formula comes down to a question of hard/soft costs versus total resultant value. In other words, did the paid-for value of your ERP consultant move the project forward positively, or was the experience more of a Pyrrhic victory.
An ROI analysis can typically be broken down into three to five necessary and highly-measured project cost elements, such as:
Project Cost Savings
This element can be more grossly stated as the ‘what one used to pay, versus what one pays now’ rule. Typically subordinate elements of this type are defined as:
- Cost measurement between previous versus improved reliability
- Cost measurement between the previous speed of production throughput, versus the speed of improved processes
- Cost measurement between previous direct support hours versus reduced direct support hours
- Cost measurement between previous FTE values versus reduced or redeployed admin staff values
- Cost measurement between previous direct consumables values versus improved processing leading to reduced consumable values
Each of these elements would then be directly associated with a dollar value, ultimately resolving up to a set of “before consultant” and “after consultant” totals.
This element is more of an ad-hoc or soft cost; although to completely understand the impact of an ultimate ROI one should include ‘anything and everything’ associated with an ERP consulting project. Consequently, subordinate elements here can include:
- Third party travel
- Third party lodging
- Third party hospitality
- Applied fees, and licenses
- All other misc.
Again the goal is to define a final delta between before and after, however, this particular element will typically define itself as a pure cost. Nevertheless, cost is cost, and applies directly to the final ROI associated with an ERP consulting project; so don’t make the mistake of believing that this element represents an apple v. orange conundrum, because at the end of the day, it doesn’t.
This element can sometimes be associated with Project Expenditures, but to clearly understand where the money went, one has to account for why one pulled the cost trigger during an ERP consultant selection process. In this case, subordinate costs involve:
- Additional consultant resources
- Additional consultant software purchase
- Consultant research and systems selection costs
- Consultancy-specific administrative costs
This element is another pure cost element but again necessary to the calculation of a solid final project ROI.
This pure cost element may appear to be obvious, but one would be surprised by the number of ERP line managers who don’t understand implementation costs, and their implications on a final ERP consultant ROI. In this case, sub-categories typically include:
- Software purchase and installation
- Database purchase and installation
- Additional licensing
- Hardware expansion
- Network expansion
- System setup, configuration, and launch
- Third-party labor costs
- Internal and enterprise training program development and delivery
- Other contingency costs
On-Going Cost Requirements
Finally, we come to on-going cost requirements - a critical element in any accurate project ROI. This is a particularly necessary element these days given the advent of cloud-computing, and its cost landscape associated with ERP. These cost components include:
- Extended licensing
- Contingent seat ownership
- Purchase of extended bandwidth and/or datarate
- Extended support and maintenance
- Extended disaster recovery programs, licensing, and systems
Once one has defined both a general value delta between before and after, and then apply follow on pure cost elements, ultimately calculating and defining a final all-in ROI becomes much easier to deal with.
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