The purchase of an ERP solution represents a significant financial decision. Although features and functionalities play a critical role, any company needs to answer whether it will be able to obtain a return on investment from its decision. Before implementation, businesses can estimate the potential ROI of NetSuite by comparing expected costs with anticipated financial and operational benefits. Once the system is implemented, actual ROI can be evaluated using the costs incurred and benefits achieved.
This blog will help you calculate ERP ROI, identify potential costs of ERP implementation, estimate payback time, and identify key performance indicators and CFO metrics that will show if the NetSuite implementation will be worth the investment.
What Is NetSuite ROI?
NetSuite ROI refers to the financial return a business may generate from its investment in the platform. NetSuite ROI can be projected before implementation and evaluated more precisely after deployment, once actual costs, savings, and business performance data are available. The ROI will help to establish if the enterprise resource planning software has been effective in generating the anticipated business value. The ROI takes into account factors such as reduced operating costs, increased productivity among workers, faster financial report generation, improved inventory control, and effective decision-making. Unlike cost analysis, NetSuite ROI takes into consideration the effects of the NetSuite ERP system from a business perspective over an extended period of time.
What Costs Should Be Included in NetSuite ROI?
In determining the NetSuite ROI, businesses are advised to take into account the total cost of the investment rather than focusing solely on the cost of software subscription. These costs can include implementation costs, data migration, integration costs, customization costs, among others. Taking into consideration all these factors paints a more realistic picture of the return on investment.
Build a Strong ERP Business Case
An effective ERP business case is built around business value rather than software capabilities. First, you need to identify what problems your organization currently faces, such as manual data entry, fragmented systems, slow reporting, inaccurate inventory records, etc. Second, you should provide a rationale for using NetSuite to address these challenges through automation, data consolidation, and real-time visibility.
Third, quantify the financial benefits of doing that. They may be in terms of labor efficiency, error reduction, cost savings, order processing improvement, reduced IT maintenance costs, etc. Last but not least, estimate your ROI and payback period. The business case should convince stakeholders of the financial value of the proposed ERP solution based on realistic assumptions.
How to Calculate NetSuite ROI
The common formula for calculating ROI is:
ROI (%) = (Total Financial Savings − Total ERP Investment) ÷ Total ERP Investment × 100
In our example, let’s say a firm spends $180,000 implementing NetSuite – that includes purchasing a license, installation, data integration, training, etc. In one year, it will save $250,000 by eliminating manual work, minimizing inventory costs, increasing efficiency, and cutting down the cost of maintaining IT infrastructure.
ROI = ($250,000 – $180,000) ÷ $180,000 × 100 = 38.9%
This means the estimated first-year financial return is 38.9% relative to the ERP investment.
Hidden Costs That Can Affect NetSuite ROI
Any accurate ROI analysis of NetSuite should consider many other factors beyond software and consulting costs. There are other expenses that are directly or indirectly related to the implementation process and have an impact on the total cost and ROI of the project. They may include:
- Migration of existing data
- Employee training and employee labor hours
- Business process optimization and customization
- Integrations and their maintenance
- Change management
- Temporary reduction in productivity due to transition
- Ongoing optimization after go-live and system administration
- License expansion due to growing business requirements.
Calculate the ERP Payback Period
This is based on the time it takes for the company to recoup its investment using the financial gains from the NetSuite software.
Payback Period = Total ERP Investment ÷ Annual Net Financial Benefit
For example, where the company has invested $240,000 and has a gain of $120,000 annually, the payback period would be 2 years.
KPIs That Measure NetSuite ROI
ROI measurement needs comparison between the performance of the business prior to implementation and that following implementation.
Baseline measurements make it easier to measure improvement.
Measure KPIs like time for financial close, inventory turnover, speed of order processing, time taken by the procurement process, forecasting accuracy, productivity of employees, days sales outstanding (DSO), and number of manual journal entries. Improvement in these factors usually results in a reduction of operational costs, improvement in cash flows, customer satisfaction, and decision-making speed, all resulting in increased NetSuite ROI.
How CFOs Can Measure NetSuite’s Financial Impact
For CFOs and business leaders, NetSuite ROI analysis should go beyond a single percentage. A broader set of financial and operational metrics can help evaluate the investment, monitor performance, and determine whether the ERP is delivering the expected business value.
Return on Investment (ROI): Calculates the profit achieved compared to the entire ERP investment.
Total Cost of Ownership (TCO): Takes into account all the costs related to the implementation of NetSuite, including licensing, implementation, training, integration, and maintenance.
Net Present Value (NPV): Determines the present value of future profits in order to understand the value of the investment made.
Internal Rate of Return (IRR): Predicts the annual rate of return and allows comparisons of ERP solutions with other investment opportunities.
Payback Period: Indicates the time needed for recovery of the investment in the implementation of the ERP system.
Operating Margin: Reflects the efficiency of the business due to cost reductions and automation.
Working Capital Metrics: Evaluates the performance of inventory, receivables, and payables management.
How to Measure NetSuite ROI Before and After Implementation
ROI analysis for NetSuite has to be conducted in two different phases, namely, prior to implementing the solution to assess the estimated ROI and post-implementation to determine the real benefits generated.
Before Implementation
- Determine business goals and expected outcomes.
- Determine baseline costs and performance levels.
- Calculate the estimated costs of implementation, licensing, integration, training, and future costs.
- Forecast savings and financial benefits.
- Calculate estimated ROI, NPV, IRR, and payback period.
Post-Implementation
- Actual costs of implementation and operations to be determined.
- Actual savings and financial benefits measured against the baseline.
- Determine productivity and efficiency improvements and changes in cost levels.
- Compare the actual results with estimates made previously.
- Calculate ROI based on actual costs and performance levels.
Should You Use an ERP ROI Calculator?
An ERP ROI calculator serves as a valuable starting point when trying to determine what kind of savings you might be able to achieve with an ERP system implementation. Yet, calculators are based on certain general assumptions and will not consider specifics of your company, its plans, and implementation issues.
To get a better idea about your potential savings, you should use the NetSuite ROI calculator along with a more specific ERP business case.
Common NetSuite ROI Calculation Mistakes
In order to properly evaluate NetSuite ROI, a pragmatic approach needs to be taken to both the expense and the value of the investment, which, if ignored, may give an inaccurate result.
1. Considering only the subscription/license fee but ignoring the cost of implementation.
2. Considering the projected savings as certain gains.
3. Ignoring the cost of employee time that will be invested in the implementation process.
4. Not accounting for reduced productivity during the implementation period.
5. Calculating ROI using gross financial gains instead of net gains minus costs.
6. Ignoring ongoing costs such as support, optimization, integration, and extra license/modules fees.
7. Calculating ROI without setting a clear pre-implementation expense/performance baseline.
8. Comparing real results to projected ones without taking into account any change in business circumstances or scope of the project.
9. Calculating ROI too early before the system and processes stabilized.
10. Calculating ROI based on ROI figures of other NetSuite implementation projects regardless of different business sizes, processes, costs, and objectives.
Turn NetSuite Investment Into Measurable Business Value
NetSuite ROI calculation before ERP investment will help businesses base their financial decisions on facts rather than hypotheses. Taking into account implementation costs, hidden costs, performance benefits, and financial indicators, companies can create a realistic investment strategy and have tangible results from it. An elaborated business case for ERP is important both in terms of gaining project approval and setting expectations. VNMT Solutions NetSuite implementation services can help businesses plan and implement NetSuite with their specific operational and financial goals in mind.
