Planning for an ERP Investment Project in 6 Steps
February 27, 2012
Learn to invest in the right ERP project for your business environment
Successful organizations consider investments in ERP (Enterprise Resource Planning) as a great opportunity for business growth and development. They regard ERP solutions as promising investment projects that will deliver value to the business. But because of economic recovery that makes the business environment fluctuating and uncertain, the organizations remain cautious about these projects. They need to be sure the technology investments will be profitable and value-driven.
And careful planning will be the way to ensure the effectiveness and profitability of any ERP investment project. In this article you will read about 6 steps of the planning process. Here we talk about how to plan for an ERP investment project in a typical company.
The Need for Investment Planning
Generally speaking, planning means designing a detailed plan that specifies actions for achieving optimum balance of needs with the available resources. Considering this definition, we can say that
ERP Investment Planning is a kind of project that steps through a range of stages to ensure that investments in ERP technology create value for the business and that this technology is integrated into the business environment. Such a project focuses on producing the deliverables that allow for the exploitation of suitable ERP opportunities.
Why do companies decide to run ERP investment projects? What is the need for ERP investment planning? The main reason is business growth. Once a company prepares itself for business growth, it needs to have a new effective technology that could allow for and contribute to this growth. This company looks for effective ways to spend its investment dollars on valued technologies. And ERP is a great example of such technologies.
Planning for an ERP investment project focuses on achieving the following 4 goals:
- Identify needs and demands that must be met by an ERP solution
- Formulate a strategy that will specify the course of action for implementing the solution
- Determine the resources (time, money, labor, etc.) necessary to support the investment project
- Provide a mechanism for implementing and monitoring the project and measuring ROI
These goals are common to all organizations that decide to invest in an ERP technology project. And there are 6 common steps for accomplishing the goals. The 6 steps are listed below:
- Identify the business need behind ERP technology (Why should we invest in ERP?)
- Assess the potential benefits of ERP implementation (What will we win by the project?)
- Calculate the potential cost of the investment project (How much money do we need to invest?)
- Analyze the risks affecting the project (What should we be concerned about?)
- Obtain authorization (Will the project be authorized by the seniors?)
- Measure ROI (How will we determine whether the success is reached?)
Let’s take a deeper look at these steps.
Step #1. Identify the business need for ERP technology
First of all, you must perform a situation analysis to find out what business challenges must be handled in your company. You must identify the reason behind implementing an ERP investment project. For this purpose, you can describe all the value-critical aspects (sales, suppliers, HR, corporate policies, assets, etc.) that drive your business. Then for each of the aspects, you must hold a needs assessment to determine what gaps exist between the actual and expected results. These gaps will be then transformed into the needs that require resolution.
For example, a needs assessment for company sales means that you compare the plan with the actual sales and see if there is a performance gap. Another example: assessing corporate policies involves the analysis of employee responses to the corporate environment and also the effectiveness of internal management activities. In case any gap exists appropriate notes should be taken, and then you must create a spreadsheet that includes the gaps and the needs to be addressed.
Among a variety of gaps that can be further transformed into business needs, the following gaps are common to most business organizations:
- Performance gaps that arise when there is a desire to grow the business
- Inefficiency in business processes caused by lack of management-critical resources
- Outdated systems that make the business environment slower
- A need for cost reduction
Step #2. Assess the potential benefits of ERP implementation
Once you have identified the business needs that must addressed by a new ERP investment project, your next step is to figure out what benefits your company will potentially gain by this project. If you suddenly find out that ERP software does not actually contribute to business agility, you can discard your current project and start looking for another one.
But ERP is a comprehensive enterprise-wide solution that your business is likely to benefit from. Here are the most possible ERP benefits:
- Business growth through managing operations cost-effectively. Now your workers are able to manage their operations and tasks locally and remotely.
- Process synchronization through enabling integration, automation, and improved decision making. Your company is provided with a single framework for planning, executing and monitoring processes in real-time. Manual processes are removed, business data is exchanged immediately, and decisions are based upon business intelligence reports.
- Better collaboration with co-workers, partners, suppliers, customers, and management. Now your company can provide quicker and better responses to any person or organization involved. ERP allows for cost reduction through minimizing response time and improving data transfer.
Step #3. Calculate the potential cost of the project
Next, you need to estimate the total cost of owning your new ERP investment project. It actually means you must determine what functionality and options your company needs, and then calculate the total cost of those ERP features. Below I give typical costs for an ERP implementation. Please read this ERP selection checklist to learn more ideas.
- Acquisition Cost. The very first item you must pay for is acquisition. The price you have to pay for an ERP software solution varies in the industry, yet the tendency remains the same. Small business ERP solutions are rather affordable than complex ERP implementations for large businesses. Your task here is to figure out what type of ERP investment solutions you want, and then get the price.
- Upgrading Cost. The cost of expanding ERP software will constitute the benefit you must pay for. I suggest you first research the market and see what upgrade options ERP suppliers provide; then make a summary to get the most affordable prices as to your business. Note ERP software should be scalable and have a modular system.
- Deployment Cost. Because most ERP systems are notorious for their expensiveness, you must look for highly configurable and adaptable software in order to minimize deployment time and therefore deliver Return on Investment faster.
- Usability. The product should be easy to use and have intuitive navigation. Your workers must learn the product quickly and painlessly. I suggest you look for solutions having a graphical process-oriented user interface. There should be also a single dashboard containing the details about tasks, resources, schedules, projects, performance, users, etc.
- Customization. The ERP product of your choice should be fully customizable in order to allow for advanced setup and configuration of company processes and operations according to your business requirements.
Step #4. Analyze the risks affecting the project
Any ERP investment project is managed under a portion of uncertainty that creates various risks. And your project won’t be an exception. You must be ready to overcome any risks and warnings if you want your business to grow and develop with ERP software. Take a look at the following types of risk and then create your own strategy for risk mitigation:
- Operational risks, mainly caused by the complexity of ERP software. Users have to spend more time and effort on adaptation, and therefore your business suffers from increased costs.
- IT-related risks, which are common to any ERP software deployment. You must have a good IT department with skilled IT guys who can do all the things related to setup, configuration, implementation and deployment.
- Financial risks, which arise in case your ERP implementation project requires expensive modules or customizations.
Step #5. Obtain authorization
This step embraces all the previous steps in order to create an implementation plan that tells you how to introduce ERP software into your business environment. After the previous steps are done, here is what you get:
- The reason behind implementing your ERP software project
- The benefits to be gained upon project completion
- The investment cost of the project
- The risks to be mitigated as the project develops
You need all this information to create a proposal of your ERP investment project and submit this document to the senior management for further decision making. The managers must review the proposal, and in case the project is approved they will provide all necessary funds.
Step #6. Measure ROI
And the final step is to be taken once your ERP investment project has been implemented. This step is to measure Return on Investment (ROI) to figure out if the project is effective in terms of the resources (time and money) invested. Use this formula for calculating ERP investment project ROI:
- Investment is the total amount of money you have spent to cover all the costs of your ERP project.
- Payback is the revenue your company receives after the project has been completed over a certain amount of time (the payback period).