Benchmarking technology success: the reasonable target ROI of ERP, by industry

In today's fast-paced business landscape, implementing an enterprise resource planning (ERP) system is a significant investment, not just in terms of finances but also in time and resources. As such, it's crucial for organisations to assess the return on investment (ROI) that their ERP system can deliver. Understanding the target ROI by industry is essential to gauge the success of these systems and to ensure that the chosen ERP solution aligns with industry-specific needs.

Understanding ERP ROI

Before diving into industry-specific benchmarks, it's important to understand what ERP ROI entails. ROI is a measure of the profitability of an investment. In the ERP context, it considers the benefits derived from the system relative to its cost. This includes direct financial returns, such as increased revenue or cost savings, and indirect returns like improved efficiency, better decision-making, and enhanced customer satisfaction.

To calculate ROI, the following formula is commonly used:

However, determining the net profit from an ERP system is complex and varies by industry, as the benefits are often long-term and multifaceted.

Industry specific ERP ROI benchmarks

Different industries have distinct operational challenges, which influence the ROI of ERP systems. Below, we explore the target ROI benchmarks for various industries, highlighting the key factors that contribute to these figures.

1. Manufacturing: target ROI = 20-25%

Manufacturing industries, particularly those involved in complex production processes, often see substantial returns from ERP systems. These returns are driven by improvements in inventory management, production scheduling, and supply chain optimisation. The automation of manual processes and better data visibility lead to significant cost savings, increased production efficiency, and reduced lead times.

For manufacturers, an ERP system that integrates seamlessly with shop floor equipment and provides real-time analytics is crucial. The target ROI in this sector is typically between 20% and 25%, with variations depending on the complexity of the operations and the extent of ERP integration.

2. Retail: target ROI = 15-20%

In the retail industry, the primary benefits of ERP systems come from better inventory management, demand forecasting, and customer relationship management (CRM). Retailers can reduce stockouts and overstock situations, improve supply chain coordination, and enhance the overall customer experience through personalised services and targeted marketing.

The ROI in retail ERP systems tends to be slightly lower than in manufacturing, averaging 15% to 20%. This is due to the highly competitive nature of the industry and the thinner margins retailers operate on. However, the ability to scale operations quickly and efficiently can significantly enhance the overall profitability.

3. Healthcare: target ROI = 10-15%

The healthcare industry faces unique challenges in managing vast amounts of patient data, ensuring regulatory compliance, and maintaining high standards of care. ERP systems in healthcare can lead to better resource allocation, improved patient scheduling, and enhanced data security. Additionally, they facilitate compliance with healthcare regulations and improve financial management.

The ROI in the healthcare sector is generally lower, ranging from 10% to 15%. This is because the benefits, while significant, are often more qualitative, focusing on patient care quality and compliance rather than direct financial returns. Nevertheless, the long-term gains in operational efficiency and patient satisfaction contribute to the overall success of the ERP investment.

4. Professional services: target ROI = 25-30%

For professional services firms, such as law firms, consulting companies, and IT services, ERP systems offer substantial benefits in project management, billing, and resource allocation. These firms often operate on tight schedules with high hourly rates, making time management and accurate billing critical to profitability.

The ROI in professional services can be as high as 25% to 30%, as ERP systems enable better project tracking, resource utilisation, and financial management. The ability to streamline operations and improve client service directly impacts the bottom line, making ERP systems a valuable investment in this sector.

5. Food and beverage: target ROI = 15-25%

The food and beverage industry requires meticulous control over inventory, quality management, and compliance with safety standards. ERP systems in this industry help manage production schedules, ensure traceability, and optimise supply chains to reduce waste and spoilage.

The target ROI for ERP systems in the food and beverage industry typically falls between 15% and 25%. Companies that invest in ERP solutions with robust supply chain and quality management capabilities tend to see higher returns due to improved operational efficiency and reduced losses from spoilage or non-compliance.

6. Wholesale distribution: target ROI = 15-20%

Wholesale distribution is a fast-moving industry where margins are tight, and efficient operations are critical. ERP systems in this sector focus on inventory management, order processing, and logistics. By automating these processes, wholesalers can reduce operational costs, optimise stock levels, and improve customer service.

The target ROI for ERP systems in wholesale distribution typically falls between 15% and 20%. This range reflects the benefits of improved supply chain efficiency, reduced stockouts, and enhanced visibility into operations, which collectively contribute to higher profitability.

7. Software and technology: target ROI = 20-25%

The software and technology industry is characterised by rapid growth, innovation, and a constant need for agility. ERP systems in this sector are used to manage product development, sales processes, customer relationships, and financials. The ability to quickly scale operations, manage complex projects, and provide real-time data insights is crucial.

The target ROI for ERP systems in the software industry typically ranges from 20% to 25%. The returns are driven by improved project management, faster time-to-market for products, and better financial oversight. As software companies often deal with recurring revenue models and global operations, ERP systems that can integrate these aspects tend to provide substantial returns.

Factors influencing ERP ROI

While the target ROI benchmarks vary by industry, several common factors significantly influence the success and profitability of an ERP implementation. These factors determine how well an ERP system aligns with an organisation’s needs and its ability to deliver tangible benefits.

1. Customisation versus standardisation: balancing flexibility and cost

Customisation and standardisation represent two ends of the spectrum when it comes to ERP implementation.

ERP customisation

A highly customised ERP system is tailored to fit the specific processes, workflows, and needs of a business. This alignment can lead to greater efficiency, as the system mirrors the company's unique operations. However, customisation comes with its challenges. It can be more costly and time-consuming to implement, requiring extensive development work. Maintenance and upgrades also become more complicated, as each custom feature may need to be reworked whenever the system is updated. This can lead to higher long-term costs and potential delays in adopting new features or enhancements.

ERP standardisation

On the other hand, standardised ERP solutions offer a more out-of-the-box approach. These systems are easier and quicker to deploy, often coming with industry best practices already built-in. While they may not meet every specific need of a business, standardised systems are generally more reliable and easier to maintain and upgrade. They are typically cheaper than customised solutions. However, businesses may need to adjust some of their processes to fit the system, which can sometimes lead to inefficiencies or dissatisfaction if key processes cannot be adequately supported.

The decision between customisation and standardisation should consider the specific needs of the business, the resources available for implementation and maintenance, and the long-term goals for the ERP system.

2. User adoption: the critical role of training and change management

No matter how advanced or well-suited an ERP system is, its success depends heavily on the people using it. User adoption is one of the most critical factors influencing ERP ROI. A system that is poorly adopted by employees will not deliver the anticipated benefits, leading to underutilisation and a lower ROI.

Training

Effective training programs are essential to ensure users understand how to operate the ERP system efficiently. Training should be comprehensive, covering not just the basics of using the system but also how it integrates into specific business processes. Ongoing training is also important as new features are introduced or as new employees join the organisation.

Change management

ERP implementations often involve significant changes to existing workflows and processes, which can meet resistance from employees. A robust change management strategy is crucial to help employees transition smoothly to the new system. This includes clear communication about the benefits of the ERP system, involvement of key stakeholders in the implementation process, and providing support during and after the transition.

High user adoption is directly correlated with ERP system success. When employees fully embrace the system, they can use it to its full potential, leading to improved efficiency, better data quality, and ultimately, higher ROI.

3. Integration: ensuring seamless connectivity across business functions

Integration is another vital factor influencing the ROI of an ERP system. Most businesses use multiple software tools to manage different aspects of their operations, such as customer relationship management (CRM), human resource management (HRM), and supply chain management (SCM). The ability of an ERP system to integrate with these tools can significantly affect its effectiveness and the returns it generates.

Internal integration

An effective ERP system should provide a unified platform where data from various departments and functions is seamlessly integrated. This eliminates data silos, ensuring that information flows smoothly across the organisation. For example, sales data can automatically update inventory levels, which then triggers purchasing orders—all within the same system. This level of integration leads to more informed decision-making, improved process efficiency, and reduced errors.

External integration

In today’s interconnected business environment, ERP systems should also integrate with external systems such as e-commerce platforms, third-party logistics providers, and suppliers’ systems. This ensures that the ERP system can manage all aspects of the business, from customer orders to supply chain logistics, providing a holistic view of operations.

When an ERP system is well-integrated, it enhances overall operational efficiency, reduces redundancies, and provides real-time insights—all of which contribute to a higher ROI.

4. Scalability: planning for future growth

As businesses grow, their needs evolve. An ERP system that is scalable can accommodate this growth, ensuring that the system continues to deliver value as the organisation expands.

Data volume

As businesses grow, the amount of data they generate and manage increases. A scalable ERP system can handle larger volumes of data without compromising performance. This is particularly important for businesses that plan to expand their operations or enter new markets.

User capacity

In addition to handling more data, a scalable ERP system should be able to support an increasing number of users. As the organisation grows, more employees will need access to the system. The ERP system should be able to manage this without a significant drop in performance or requiring a complete overhaul.

Functionality expansion

A scalable ERP system should also allow for the addition of new modules or functionalities as the business evolves. For example, a business that initially focused on domestic operations may later need to add modules for international trade, multi-currency transactions, or advanced analytics. The ERP system should be flexible enough to accommodate these new requirements without extensive reconfiguration.

Scalability is crucial for ensuring that the ERP system continues to provide value over the long term, supporting the organisation’s growth and contributing to a sustained high ROI.

Final thoughts

Benchmarking the ROI of ERP systems by industry provides valuable insights for businesses considering or evaluating their ERP investments. While the exact ROI will depend on various factors, including the specific challenges and goals of the organisation, understanding industry benchmarks can help set realistic expectations and guide decision-making.

Ultimately, the success of an ERP system is not solely defined by financial returns but also by the improvements in operational efficiency, customer satisfaction, and competitive advantage that it can deliver. By aligning ERP capabilities with industry-specific needs, businesses can maximise their ROI and achieve sustainable growth.

To explore what is involved with the implementation of the right ERP platform for your business, contact us.