ERP ROI and the business case: recording costs, benefits and assumptions
Contents
A finance director is handed a proposal for a new ERP system during the budget round. At the bottom is an ERP ROI that looks attractive. She turns back through the pages to see where that figure comes from. Who decided that order processing will speed up? Who is counting on lower stock levels, and on what basis? Half of her questions get no answer from anyone at the table, and yet she is the one being asked to sign.
A proposal like that is not necessarily wrong. The figure may well be right. But a board that cannot see which assumptions it rests on cannot, in our view, weigh it against other investments, and cannot come back to it later. That is what this article is about.
ERP ROI is the benefits of an ERP investment minus its costs, divided by the costs, over a period agreed in advance and on recorded assumptions.
Below we describe how to organise the costs, benefits and assumptions behind that figure, how to do the calculation and how to turn it into a decision document the board can stand behind. At the end you will find the questions you can use to have your own business case reviewed independently. We have written this article so that you can also put it to work yourself. Read more about business and IT strategy on the page about that topic.
What ERP ROI is, and what a business case adds
ROI, TCO, payback period and business case are closely related, but each answers a different question. Keep them apart, and you can check what a proposal leaves out.
| Term | The question it answers | What it does not tell you |
|---|---|---|
| ROI (return on investment) | What are the benefits minus the costs, relative to the costs, over an agreed period? | How certain the benefits are, and who is accountable for them |
| TCO (total cost of ownership) | What does the system cost over its whole life, from purchase to support and replacement? | Which benefits stand against the costs |
| Payback period | At what point do the cumulative benefits equal the cumulative costs? | What happens afterwards, and whether the benefits last |
| Business case | Why choose this investment, against which alternatives, on which assumptions and with which risks? | Nothing on its own: in our view it is only as strong as the assumptions in it |
An ERP business case is the decision document that sets costs, benefits, assumptions, risks and alternatives side by side, so the board can make a reasoned choice.
The ROI is therefore one outcome within the business case. We think it is wise never to present that outcome on its own. An ROI without its assumptions gives the reader a number, but no way of checking it.
The cost side in brief
The cost side is the TCO of an ERP system: everything it costs over the period you choose for the calculation. That includes licences and the implementation, and also the time of your own people, support after go-live and the interfaces with other systems. Here we work out the other side in more detail: the benefits and the assumptions.
There is one point we do want to make about the cost side. Record which period you are calculating over, and use that period for the benefits as well. A business case that adds up costs over a short period and benefits over a long one is, in our view, flattering itself.
Naming benefits: four kinds, each with an owner
Of the costs and benefits of an ERP system, we find the benefits harder to estimate, because they do not yet exist at the moment you decide. We distinguish four kinds. For each, we recommend recording in advance who looks after the benefit and how you will measure it.
| Kind of benefit | Example | Owner | How it is measured |
|---|---|---|---|
| Financial | Less manual work in the finance team | Financial controller or finance director | Hours per month-end close, before and after |
| Process | Orders that pass through the system without manual correction | Operations manager or process owner | Share of orders with no manual intervention |
| Risk | Less dependence on one employee or one ageing system | IT manager or CIO | Number of processes relying on one person or one old system |
| Strategic | Room to connect a new channel or a new site | Board | Whether that decision can be carried out without a new system |
Some benefits are, in our view, hard to express in money. That need not be a problem, as long as you state openly which benefits you count in the ROI and which you deliberately leave out. We find it cleaner to describe risk and strategic benefits separately than to slip them into the calculation with an estimated amount.
There is academic work on this subject. In a case study of two companies published in the peer-reviewed journal Sustainability (Anaya, Flak and Abushakra, 2023), the authors describe benefits management as a good practice and a systematic approach to realising benefits from information systems. They add a caveat: in their view the approach may fall short for benefits that only emerge in use, such as when the ERP system is connected to newer digital technology. We read that as a reason to keep the benefits list up to date after the choice, rather than closing it when the decision is made.
Recording assumptions: the list beneath every ROI
We assume that every benefit and every cost item rests on an assumption. How many orders will you process per day? How many hours does your team spend on the month-end close today? Which interfaces will remain? We recommend putting those assumptions in a separate list, with four columns for each:
| Column | What you record |
|---|---|
| Assumption | What you are assuming, in one sentence and as concretely as possible |
| Source | What the assumption is based on: a measurement, a quotation, an estimate by a colleague |
| Owner | Who made the assumption and stands behind it |
| Sensitivity | What happens to the outcome if this assumption does not hold |
We attach particular value to the last column. For each assumption, ask yourself: if only half of this assumption holds, is the investment still defensible? If the answer turns negative for one or two assumptions, you know where the business case is fragile, and where you need more evidence before you sign.
An assumption whose source is an estimate is not wrong. It does help if the board can see that. The board can then weigh the figure differently from an assumption that rests on a measurement.
How do you calculate ERP ROI?
The calculation itself is simple. You subtract the costs from the benefits and divide the result by the costs, over the same period agreed in advance:
ERP ROI = (benefits − costs) / costs
The example below is a fictional example, not an expectation. The figures are round placeholder values without a unit, chosen only to show how the formula works.
| Starting point | One assumption shifts | |
|---|---|---|
| Costs over the period | 100 | 100 |
| Benefits over the period | 120 | 90 |
| Benefits minus costs | 20 | −10 |
| ROI | 0.2 | −0.1 |
In the second column one benefit turns out lower than assumed, for example because the time gained in order processing is smaller than expected. In that case the ROI turns negative. That is exactly what the sensitivity column in the assumptions list should make visible: the outcome depends on the assumptions, and it can fall below zero.
The payback period is the point at which the cumulative benefits catch up with the cumulative costs. We deliberately give no timeframe here. It depends on your own costs, benefits and assumptions, and a timeframe from someone else’s proposal in our view says little about yours.
The business case as a decision document: alternatives side by side
The ROI of a single option tells us little without a comparison. We recommend setting at least three alternatives side by side in every ERP business case, with the same columns for each.
| Alternative | What it means | What to watch |
|---|---|---|
| Do nothing | Keep the current system and the current support | Doing nothing can also have costs and risks; write them down |
| Upgrade or reconfigure | Update or reconfigure the current package | Which bottlenecks does this solve, and which remain? |
| Replace | Select and implement a new ERP system | Which assumptions carry the benefits, and who stands behind them? |
Whether your current system really needs replacing is a separate question. We have written about the signs in when your ERP is due for replacement. If you choose to replace, the business case becomes the basis for your ERP requirements and for the ERP selection.
Who decides? In our view the business case belongs with the board or steering committee that allocates the budget, and each assumption belongs with someone in the line who knows the work. That gives the business case an owner at every level: the board for the decision, the line for the assumptions.
Tracking benefits after the choice
In our view a business case loses its value if nobody looks at it after the decision. We recommend taking a baseline measurement before the start, using the measures from the benefits table, and repeating it after go-live with the same definitions. That requires agreed figures, with an owner who explains why they move. Those figures then become part of the management information on which the board tracks the benefits.
The Independence Check: questions to test your business case
Whoever draws up a business case may have an interest: a vendor who wants to sell a package, an implementation partner who wants to run a project, or an internal department that already has a preference. We consider that interest legitimate. In our view, it does mean the assumptions deserve a second look from someone with no stake in the outcome. You can also ask the questions below yourself. For background on what independent advice involves, see our guide to independent ERP advice.
About the assumptions
- Does every benefit show who estimated it and on what source?
- Is it known, for every assumption, what happens to the outcome if it does not hold?
- Are costs and benefits calculated over the same period?
About the alternatives
- Are doing nothing, upgrading and replacing set side by side with the same columns?
- Are the costs and risks of doing nothing worked out as seriously as those of replacing?
- Is it clear which benefits are in the ROI and which have been deliberately left out?
About the interests
- Who drew up the business case, and what interest does that party have in the outcome?
- Which assumptions come from a party that earns from the choice?
- After the decision, is there an owner who tracks the benefits?
What the outcome means
| Outcome | What we recommend |
|---|---|
| Yes to all or nearly all questions | Go ahead with the decision; record the baseline |
| No to one or more questions about assumptions | Complete the assumptions list first, then decide |
| No to one or more questions about alternatives | Set the alternatives side by side again before the decision |
| No to one or more questions about interests | Have the business case reviewed by a party with no stake in the outcome |
This table is a rule of thumb of our own; it has not been measured against anything. Use it to choose which step comes first. It predicts nothing about the return on your investment.
When should you act?
We would look at a business case again before you sign if any of these situations sound familiar:
- The ROI is in the proposal, but the assumptions behind it are not.
- The business case was drawn up by the party that wants to supply the package or the project.
- Only one option is on the table, without doing nothing or upgrading being worked out.
- Nobody in the line has taken responsibility for the benefits.
- There is no agreement on who tracks the benefits after go-live.
When is an independent review not needed?
In our view an external review adds little if the investment is small relative to your budget, if the assumptions rest on your own measurements and if the alternatives are already set side by side. And if your own financial controller or finance director drew up the business case, with the assumptions list and the sensitivities, you can use the questions above as an internal check and carry on.
Why we look at the people first when we review a business case
In our view, every assumption in a business case comes from a colleague who knows the work: the warehouse manager who knows how long an order really takes, the controller who carries the month-end close, the planner who sees where things get stuck. We believe a business case only becomes reliable once those people have been asked and recognise themselves in the figures.
In our view, a business case is work done by people: we would rather have one more conversation than a figure in the proposal that nobody stands behind.
We believe our independence makes that conversation possible. ERP Company is not a certified partner of SAP, Oracle, AFAS or Exact. We have no reseller contracts and receive no commissions or kickbacks, and we charge by the hour or at a fixed price.
So for us, no commission or kickback is attached to the choice of a particular package. In our view, that is the basis for saying plainly which assumption lacks evidence.
Having your business case reviewed independently
Is there a business case for a new ERP system on your desk, or are you writing one yourself? Then we would welcome the chance to go through it calmly with you in an Independence Check: we walk through the assumptions, the alternatives and the interests with you, using the questions in this article. You can request the Independence Check, without obligation, via our contact page. If you would like to read further first, you will find background under business and IT strategy.
Frequently asked questions
What is the difference between ERP ROI and a business case?
ERP ROI is a single outcome measure: benefits minus costs, divided by the costs, over an agreed period. A business case also records the alternatives, the assumptions, the risks and the owners.
The ROI is therefore one part of the business case. We recommend never presenting it without the assumptions list, so the board can see what the figure rests on.
How do you calculate ERP ROI before you choose a system?
You calculate ERP ROI by subtracting the costs from the benefits and dividing the result by the costs: (benefits minus costs) divided by costs. Calculate costs and benefits over one period agreed in advance and record the assumptions alongside. The outcome depends on those assumptions and can also be negative.
For each assumption, note what happens if it does not hold. In a case study of two companies, both identified some benefits in advance in their business case, but according to Anaya, Flak and Abushakra (2023) it was difficult to determine those benefits in detail early on.
What is the difference between TCO and ROI for an ERP system?
TCO is the sum of all costs of an ERP system over its life, or over the period you set for the calculation; ROI sets the benefits against those costs: benefits minus costs, divided by the costs.
TCO is therefore the cost side of the ROI calculation. Record over which period you count it, and use the same period for the benefits.
Which benefits do you include in an ERP business case?
Include the benefits you can name in advance, each with an owner and a way of measuring it. We distinguish four kinds: financial, process, risk and strategic benefits.
We regard a benefit in the business case as an assumption you want to be able to check, not as a given. So state which benefits you count in the ROI and which you deliberately leave out, for example because they are hard to express in money.
Which assumptions should you record, and who approves them?
Record every assumption that a cost item or a benefit rests on, with its source, its owner and what happens to the outcome if it does not hold. In our view, the board or steering committee that allocates the budget approves the list.
Make someone in the line who knows the work the owner of each assumption. The board can then see which figures rest on a measurement and which on an estimate.
How do you track whether the benefits materialise after the choice?
Take a baseline measurement before the start, using the measures you recorded for each benefit, and repeat it after go-live with the same definitions. For each benefit, appoint an owner who explains why the figures move.
We recommend keeping the benefits list up to date after the choice rather than closing it at the decision. Those figures then become part of your management information.
When should you have an ERP business case reviewed independently?
Have an ERP business case reviewed independently if you have doubts about the assumptions, if the alternatives are not set side by side, or if it was drawn up by a party that earns from the choice.
You can request that review as the Independence Check, via our contact page.