Cost Benefit Analysis in ERP

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The famous Ford Pinto Case is a renowned illustration of how an organization can get muddled up in Cost Benefit analysis. The costs due to Ford Pinto design flaw was about $49.5 million, ie. based on probable accident rate. This was much less than the cost of issuing a recall which was $137.5M Hence Ford decided not to recall the cars according to the CBA. Ford overlooked the costs of negative publicity and eventually had to anyway recall the cars. The CBA by Ford was the decision that was better and cheaper for Ford only.

A fundamental issue here is on whose behalf the cost benefit analysis is being completed. Decision makers are rationally self-interested. Are you also considering your employees, your organizational culture, the geography of the organization and other socio-demographic aspects?

A few aspects to be considered while making CBA in ERP are Fitment, Implementation duration, Costs, Flexibility, Usability and Socio-Cultural issues alignment to best practices along with Executive Satisfaction, Employee satisfaction.

Lower costs – Although, cost is an important factor, it should not be a determining factor. The software’s ability to meet your need comes first. Do not mix up the must-haves with the nice-to-haves.

SMAC – Look at if the ERP is Social, Mobile, Analytic and Cloud oriented.

The Social Aspect – Executive Satisfaction and Employee Satisfaction are two important facets and should be considered while making an ERP selection and should be certainly achieved. During an ERP implementation life cycle, employees are asked to contribute to the organizational change and hence evolve in relation with this change. An organization may have irate and demotivated employees because of a decision of having a cheaper and faster implementation of an ERP. The perceived resource planning software may over-consume the employees’ bandwidth in terms of planning itself and is now alleged as a data entry and reporting software only rather than a resource planning software.

In general while performing a CBA, one should always choose the option where benefits outweighs cost, ceteris paribus, all other things held constant. For organizations, there needs to be a structured way of selecting an ERP based on a complete business case and ROI study. For choosing an ERP, it is important to consider the existing customers in your space and the best of breed vs cost, what an informed ERP buyer should look for when selecting a new solution, and the potential consequences of a poor ERP choice..

Here’s a quick CBA for selecting an ERP, based on numbers obtained through a research.

Option 2 looks lucrative with:

  • High Market share
  • Medium Duration
  • Lower Cost (although unpredictable)
  • Medium benefits realization
  • High satisfaction
  • Low business risk

Performing CBA is a daunting tasks when it comes to making good choices. CBA are of two paradigm - Financial and Economic/Social. A third paradigm around CBA is conceiving CBA in the public interest. Hence, It must demonstrate the stakeholders benefit. It is not just about doing things cheaper and better.