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The Development of Enterprise Resource Planning Systems
important. It is much easier to customize an ERP program during system configuration,
before any data have been stored.
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What Return Can a Company Expect from Its ERP Investment?
The financial benefits provided by an ERP system can be difficult to calculate because
sometimes ERP increases revenue and decreases expenses in ways that are difficult to
measure. In addition, some changes take place over such a long period of time that they are
difficult to track. Finally, the old information system may not be able to provide good data on
the performance of the company before the ERP implementation, making comparison difficult.
Still, the return on an ERP investment can be measured and interpreted in many ways:

• Because ERP eliminates redundant effort and duplicated data, it can
generate savings in operations expense. And because an ERP system can
help a company produce goods and services more quickly, more sales can be
generated every month.
• In some instances, a company that does not implement an ERP system might
be forced out of business by competitors that have an ERP system—how do
you calculate the monetary advantage of remaining in business?
• A smoothly running ERP system can save a company’s personnel, suppliers,
distributors, and customers much frustration—a benefit that is real, but
difficult to quantify.
• Because both cost savings and increased revenue occur over many years, it is
difficult to put an exact dollar figure to the amount accrued from the original
ERP investment.
• Because ERP implementations take time, there may be other business factors
affecting the company’s costs and profitability, making it difficult to isolate
the impact of the ERP system alone.
• ERP systems provide real-time data, allowing companies to improve external
customer communications, which can improve customer relationships and
increase sales.

How Long Does It Take to See a Return on an ERP Investment?
A return on investment (ROI) is an assessment of an investment project’s value, calculated by
dividing the value of the project’s benefits by the project’s costs. An ERP system’s ROI can be
difficult to calculate because of the many intangible costs and benefits previously mentioned.
Some companies do not even try to make the calculation, on the grounds that the package is
as necessary as having electricity (which is not justified as an investment project). Companies
that do make the ROI calculation have seen widely varying results. Some ERP consulting
firms refuse to do ERP implementations unless their client company performs an ROI.
Peerstone Research reported on over 200 companies using SAP or Oracle ERP systems and
found that 38 percent of survey respondents do not perform formal ROI evaluations.
In the Peerstone Research study, 63 percent of companies that did perform the
calculation reported a positive ROI for ERP. Manufacturing firms are more likely to see a
positive ROI than government or educational organizations. However, most companies
reported that nonfinancial goals were the primary motivation for their ERP installations.
Seventy-one percent of those companies surveyed said that the goal behind the ERP
installation was improved management vision. Although Nestlé USA had problems with its
ERP implementation, it estimated a cost savings of $325 million, after spending six years
and over $200 million on the implementation.

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