Achieving ERP Implementation Success through Closed-Loop ROI

Today’s business owner often sees a return on investment (ROI) as simply the ratio of value gained or lost on an investment relative to the amount of money invested. As with any capital acquisition, ERP systems are no exception. The problem is, it can be difficult to quantity the benefits of a new ERP software system.

Planning, evaluating and implementing a new ERP system is one of the most daunting initiatives that any organization can undertake. While the operational benefits and positive bottom line achievements can be significant, a poorly planned systems initiative places tremendous risk on the business’ ability to properly manage its assets and service customers properly.

To minimize risk and maximize ROI, it is essential that the business leaders become engaged early in the process. By working closely with the technology team, stakeholders can take an active role in the expected payback of a well-planned and successfully implemented ERP initiative.

Top ROI Goals
According to a recent report by Boston, MA-based Aberdeen Group, 74% of the top performing small to mid-size businesses have 33% more aggressive plans for achieving a return on their ERP investment. The most common ROI-related ERP achievements among the top performing businesses include:

• Reductions in operational costs
• Increased profits
• Better utilization of resources
• Reductions in G&A
• Reduction in inventory costs

Closing the Loop on ROI Measurement
Despite pre-sale representations, however, ROI does not come boxed, shrink-wrapped and delivered with the ERP distribution media. ROI comes from your organization’s ability to utilize the manufacturing software to support business process improvement (BPI). Therefore, view your ERP system as a set of enabling tools. Then, go about understanding how best to use those tools.

In the case of ERP implementations, you can't manage what you don't measure. And unless you measure, you’ll never know if things are really getting better or worse. While these issues form the basis for identifying both operational (BPI) and financial (ROI) performance achievements associated with a new ERP system, how can you establish a closed-loop process for quantifying success? By following the proven set of ERP implementation rules below.

Rule #1 – Measure to Manage what’s Important to the Business

Business drivers are simply external or internal influences that significantly impact or set direction in your business. Identifying and prioritizing these drivers are critical first steps in creating the ERP plan. Understanding the organization’s goals around the ERP system is also a critical first step. If the business drivers and goals are not clear, they need to be established before you begin your ERP initiative.

Let’s say you believe your business operates well enough today, but you foresee increasing competition, growing pressures on pricing and a need for product line updates and changes. (These are the business drivers.)

Your business goal is to grow while retaining profitability. This will require new tools that help the business become more aware, agile and proactive towards your markets.

Now you can begin the process of translating business awareness, agility and pro-activity into an ERP strategy that supports profitable growth based on the established business drivers. The good news is, identifying the systems, activities and functions that need to be working well to achieve a successful strategy is relatively simple.

To get you started, here are a few key improvement areas discussed in various industry studies:

• Improving end-to-end business execution
• Creating/expanding performance effectiveness in marketing/sales channels
• Developing more efficient trading partner relationships
• Reducing costs associated with operations/production/materials

Rule #2 – Begin Early (And it’s Never too Early to Begin)

During the ROI discovery process, it’s possible to identify improvement opportunities that can be put into place well before a new ERP system is selected. Streamlining operational processes is a great example. For instance, creating more efficient shop-floor workflows or improving order fill-rates through more effective inventory purchasing are improvements that can be made independent of your ERP system. Other improvements might result from revising internal policies that are vague or inconsistently applied, such as pricing discount and credit term eligibility.

Another reason to begin ERP planning early – even before the initial stages of assessing feasibility and defining system requirements – is to create a strong foundation for your initiative. An ERP team can quickly become distracted by technical details and enamored by vendor systems. When this happens, they risk losing focus on the end investment goals. By using the business drivers and goals as a foundation, your team will be able to keep ROI, value streams, key performance indicators (KPI) and realistically achievable results at the forefront of the effort.

Rule #3 – Follow a Consistent Methodology, Such as the DMI (Define, Measure, Improve) Approach

A variety of proven, industry accepted methodologies exist that can be helpful for inducing structure, discipline, focus and an adherence to a timeline for results.

An open and well-run process methodology breaks down barriers and encourages open communications that unify project objectives. More importantly, a continuous improvement outcome will help assure that initially implemented improvements do not become frozen in time.

The DMI Methodology illustrated below is one approach to consider. Six Sigma programs also offer variations on the basic DMI theme.

Rule #4 – Understand How Your Business Operating Model will Evolve Over the Next Three to Five Years

Based on your business drivers and goals, how do you expect your business operating model to evolve over the next three to five years? Will it change significantly or remain mostly the same?

Evolving towards a highly interactive e-commerce storefront, for example, involves significant planning and systems execution support from back-end ERP systems. On the other hand, adding a new line to an existing product requires a different approach. Don’t be afraid to stretch the possibilities, and include ROI and performance metrics based on each new operating paradigm.

Rule #5 – Regularly Publish and Communicate ROI Expectations,Benchmarks and Metrics throughout the Organization

Publishing ROI expectations, benchmarks and metrics is an important part of communicating the desired end results of your ERP plan. To build support for the plan at all levels of the organization, identify specific leaders and champions to help communicate expectations and serve as advocates during the implementation. In addition, be willing to adjust your assumptions when new information comes to light, and communicate why a metric or benchmark has changed.

In your communication efforts, don’t overlook the rewarding of small successes. Small, successful steps forward create consistent progress towards achieving the goals/metrics established. For example, if incremental improvement is achieved on previously poor order fill-rates, let your employees know about it! Then, continue working towards your ultimate goal of a 97-99% improvement in fill-rate times. Give your people positive feedback as they achieve milestones along the way.

Rule #6 – Find Metrics and Attributes that Complement Your Industry

Support your efforts by seeking out industry reports on ERP performance and results. Even your own customers and suppliers can be a testimony and provide a basis for metrics and ROI achievements.

A very common supply chain issue is achieving an optimum balance between purchasing levels, inventory and customer service levels. Measure your inventory turns, fill-rates and stocking levels. Are they ideal, and where you want them to be, based on your customers’ experiences? Are you constantly expediting purchase orders from your suppliers?

Once you have identified basic performance metrics associated with your industry, you can decide if you want to become a best-in-class organization or simply match your industry’s standard.

Rule #7 – True ROI is a Long-Term Proposition that is Synonymous with Continuous Improvement

Far too often we see companies create the necessary momentum to achieve a worthwhile initial implementation, only to allow their new ERP system to simply slip into day-to-day maintenance mode. The problem with this is that true ROI is achieved over the long term. That’s why you should regularly challenge your organization to find and reward the individuals who continually apply improved processes and systems to the enterprise.

Vendors annually invest millions to update and improve their ERP software capabilities. Shouldn’t your business make a parallel effort to continually innovate?

Rule #8 – Educate, Educate, Educate

According to Peter Senge, director of the Center for Organizational Learning at the MIT Sloan School of Management, “learning organizations” are those where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free and where people are continually learning to see an integrated picture.

Culturally, strive to become a learning organization. Then, on a clear day you can see ROI forever.

ERP Opportunity Checklist
With these ERP implementation rules established, I want to close with a useful and thought provoking checklist, courtesy of CTS Guides. As you go through the list, see how many items you can identify as opportunities awaiting discovery in your own organization.

Assemble your key management team and initiate a series of open and introspective discussions on opportunity identification based on the various checklist categories. Check off and prioritize items that are worthy of further investigation. Then, apply your methodology of choice to see where it leads.

With a bit of due diligence – and a closed-loop system for measuring the results – your efforts could produce an ERP implementation that becomes a veritable ROI goldmine!

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About CTS Guides
This article is presented by CTS Guides, a leading publisher of independent software reviews, ratings and evaluation tools. Since 1983, we have helped over 23,000 companies evaluate and select new software. Get your free Manufacturing Software Selection Kit and Smart Shortlist™ Consult at www.ctsguides.com/manufacturing.asp.

About the Author
Tom Garske is a founder and principal with Consulting Associates, a Minneapolis, Minnesota-based business and technology consultancy. Tom's primary activities include business and enterprise systems planning, search, process improvement and implementation. His primary focus is on small to mid-sized company owners who are committed to achieving growth, profitability and superior technology business systems. Prior to Consulting Associates, Tom was a Management Advisory Services Principal with a regional public accounting firm.  His work experience further includes account and implementation management services with an international computer company. For more information, Tom can be reached at tomg@regardingroi.com.

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