How to Calculate ERP ROI (With a Simple Worked Example)

Most ERP business cases are either too optimistic or too vague. Here's a method that holds up when a sceptical finance director looks at it.

Step 1: Measure the baseline

You can't measure improvement without a starting point. For each process the ERP will touch, write down today's numbers:

• Hours per week spent on manual data entry and reconciliation
• Order error rate and the cost of fixing errors
• Stock accuracy and the value of write-offs
• Inventory value and stock turns
• Days to close the month
• Stockouts and lost sales, if you can estimate them

Get these from real data where you can, not guesses.

Step 2: Estimate hard benefits

Hard benefits are ones you can measure in money:

Be conservative. Use the lower end of every estimate.

Step 3: List soft benefits separately

Better decisions, happier customers, faster quotes, less stress at month-end. All real, all hard to price. List them, but don't add them into the ROI total.

Step 4: Count all the costs

Include:

• Licences (over the full period)
• Implementation
• Data migration
• Integrations
• Training
• Hosting
• Support and upgrades
• Internal time: the hours your own team will spend on the project

Internal time is the one people leave out. It's often significant.

Step 5: Do the sums

Over three or five years:

• ROI = (total benefits - total costs) / total costs
• Payback period = the point where cumulative benefits exceed cumulative costs

A worked example

A distributor with 25 staff. All numbers are illustrative.

Annual hard benefits

• Order entry and reconciliation: 30 hours a week saved x $35 x 48 = $50,400
• Inventory reduced by $150,000 at a 20% carrying cost = $30,000
• Fewer picking errors and returns = $12,000
• Two software subscriptions retired = $6,000
• Total: $98,400 per year

Costs

• Implementation, migration, integration and training: $90,000 (one-off)
• Licences, hosting and support: $30,000 per year
• Internal time during the project: $20,000 (one-off)

Three-year view

• Benefits: $98,400 x 3 = $295,200. In practice, ramp-up means less in year one, so call it $250,000
• Costs: $110,000 + $90,000 = $200,000
• ROI ≈ 25%. Payback in roughly year two to three.

Your numbers will be different. The method is the useful part.

Make it real after go-live

Measure the same baseline numbers six and twelve months after go-live. If benefits aren't showing, look at adoption first. Unused features and side spreadsheets are the usual culprits.

Want help building the case? Our ERP consulting work often starts here. Related: how much ERP implementation costs.