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ERP systems can definitely help a firm become more productive and boost revenue. But measuring revenue is not the easiest of tasks. I was involved in two large ERP implementations and was always more comfortable appraising investment purely in terms of its potential to cut costs.

Savings can prove elusive despite talk of employee productivity gains and cross-business marketing opportunities waiting to be tapped. Hence, I prefer to assess a project on the basis of hard returns, that is, potential to cut costs. Let me portray one such cost-based method.

Building a cost-based business case for ERP involves extracting the savings that depend on ERP alone from the total savings to be had from ERP together with other sources. This can be done in the following way:

Step 1: Calculate year-by-year savings without the ERP system in place.

Step 2: Calculate year-by-year savings with ERP and include savings that do not depend on ERP.

Step 3: Subtract the savings derived in the first step from ERP-case savings in the step two on a year-by-year basis. The amount needs to be discounted to arrive at a net present value (NPV) of the residual cash flow.

A positive NPV will indicate that you should probably proceed with the deployment of ERP. It definitely helps if you can conduct an analysis to ensure that the business case is strong enough to withstand slippage and cost overruns. For instance, you would then know whether a project was still worthwhile if the deployment schedule were to slip by as much as a year or costs were to overrun by a couple of (Rs) crore.

All ERP costs need to be allocated to individual business units so that they can factor them into their planning. This way each unit is held responsible for producing the promised savings.