June 2, 2020  
 
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ERP Selection Methods

Written by Clayton Reeves for Gaebler Ventures

ERP systems can be costly to implement. As such, when choosing an ERP system, it is important that you take time to select the right ERP system or set of modules for your business.

Determining whether or not to undertake a project, such as an enterprise resource planning (ERP) system, can consume valuable resources and time.
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In order to do this in the most efficient manner, it is important to have a plan of action, and this is particularly important when you are selecting an ERP solution.

When an ERP system is being considered, it is extremely important to weigh all of the options carefully. This is because of the time, money and training that will be consumed by implementing such a system. There are three criteria that are generally used when evaluating whether to approve a project such as an ERP solution.

Financial Considerations When Choosing an ERP Solution

Financially speaking, projects must make money to be acceptable. As such, there are several measurements that the finance department may make in order to determine whether or not a project is feasible. If the project doesn't make money, after all, there seems little incentive to undertake it.

Net present value (NPV) is generally the most accepted method of valuing a project. It takes into account the time value of money and cash flows generated. The cash flow and discount rate selection process is the most important part of an NPV calculation. Determining an average cost of capital for your firm and the predicted cash flows will help you get an accurate result from the NPV calculation.

Budgetary constraint is the most used method when considering IT projects. This is because if the company cannot afford it, then it isn't even worth the effort of the selection process. The IRR and payback methods were also very popular for many firms dealing with IT implementations.

Management Considerations When Choosing an ERP Solution

On the management side, there are more variables to consider than simply dollars and cents. For example, managers may differentiate between implicit and explicit business needs, legal needs, environmental concerns and competitive pressures. This can make the management side of valuation very difficult to quantify. Generally, companies take a few factors and try to create a scoring system that can be objectively applied across the options.

Sometimes probability of achieving the intended benefits is included in this part of the calculations, and other times it is included in the financial part of the process. Probability seems to be more directly tied to things like expected return, so it would make sense to assess a probability variable to your financial calculations. However, the probability of achieving the benefits instead of simply succeeding in implementation takes on a different look. This sort of probability may be more directly tied with a softer science such as management.

Development Considerations When Choosing an ERP Solution

Development is usually the least important decision factor in these processes. One of the most important factors is the probability that a project will finish on time. This simply doesn't happen very often, so it is important to determine what sort of adverse effects this could have on business operations.

When he's not playing racquetball or studying for a class, Clayton Reeves enjoys writing articles about entrepreneurship. He is currently an MBA student at the University of Missouri with a concentration in Economics and Finance.

Related Articles

Want to learn more about this topic? If so, you will enjoy these articles:

ERP: Build or Buy
ERP Modules
Evolution of Enterprise Resource Planning Systems


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