The Real ROI on CMMS System Implementation
The Real ROI on CMMS Systems
By Bryan D Weir
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There is no doubt that the effective use of Computerised Maintenance Management Systems (CMMS) can significantly improve maintenance department performance. These systems can be quite expensive and, even though their cost is much lower than it was five or 10 years ago, it may still represent a substantial investment. This will generally mean that to get your hands on the capital required you will most probably have to demonstrate some tangible Return on Investment (ROI). This article, from Perspective CMMS, sets out to show you some methods that you can use to do so. It also provides examples of the very real savings that you can anticipate through good CMMS implementation.
In essence, an ROI calculation results in a value that represents the benefits received from a project against the total costs of the project. Within the maintenance engineering industry ROI from CMMS implementation is often the subject of much discussion and disagreement. There are good reasons for this. If you ask ten different accountants how to calculate ROI the chances are that you would get ten different answers. A certain amount of "poetic license" can also be evident, depending on whether the person crunching the numbers favours the project. All of this does not mean that we cannot arrive at a reasonably sensible ROI figure.
How is ROI Calculated?
Don’t panic, we are going to keep this very simple! First of all let me repeat that whilst there are several methods of ROI calculation, in its most basic definition a project ROI is equal to the benefits received, less the total costs. This is expressed as a percentage in the following formula:
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This simple formula can be developed further if the calculation is required to be made over a period of say three years thus:
[pic]
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(Note that 0% ROI is the break even point)
You may hear arguments that CMMS software purchase in itself will yield no ROI. This is a moot point, which could be made about any software implementation, (just as this formula could be used for any IT project). It could be said that the ROI is really a result of the better practises, methods and procedures invoked through the use of the new software. This is true, and we will accept that any ROI arising from the implementation is only partially attributable to the software purchase. Conversely, we must also accept that to achieve any ROI the software purchase is a prerequisite.
Where do we get the Cost and Benefit data?
OK, we now have our simple formulae so we can go ahead and "plug in" our figures. This is where the real problems arise because quite often the benefits of CMMS implementation are less than tangible. It would be virtually impossible to calculate ROI on your overall maintenance department costs and clearly, a company with no CMMS is unlikely to have the specific maintenance cost data upon which their calculations need to be based. It is often easier to calculate when your overall costs are broken down into the component parts, which have a potential for producing a tangible benefit. Most of these are listed below and the savings from only one can often demonstrate sufficient ROI to justify the purchase of your CMMS.
• Overtime Reductions
• Staff Optimisation and Productivity Improvements
• Equipment Availability - Downtime Reductions
• Equipment Availability - Better Maintenance Planning
• Prolonged Asset Life
• Energy Reductions
• Inventory Reductions through Improved Stock Control
Three examples for maintenance costs that may be available to you are provided below.
Example 1 - ROI from Overtime Reductions
Maintenance departments whose planned maintenance (PM) is not well organised often have a high overtime budget. Overtime may have its own cost centre in your company or it may be otherwise recorded. Either way it is likely to be one figure that is available somewhere. Your planned maintenance may be routinely done at weekends or during other overtime shifts because "that's the way it's always been". If premium payments are paid for overtime working this budget can often form a significant part of your maintenance payroll. Introduction of a CMMS will encourage better planning of this maintenance. Analysis and optimisation of your PM schedule will lead to less PM being required and in addition, you will find that the new data that will be available will allow you to plan a proportion of it at times other than during overtime shifts. This should result in a significant saving on your overtime budget.
Using simplified data, if your manufacturing plant has 20 maintenance technicians earning £20K per annum the annual cost of this is £400K. If these 20 technicians earn an average of 10 paid hours per week in overtime, (an OT level of approximately 25%) this will cost an additional £100K. Let's now say that a not unrealistic reduction of 30% (equal to £30K) in overtime levels is the target through the three year period after implementation. Typical benefits and costs could be:
| |Year 1 |Year 2 |Year 3 |Total |
|Benefits through overtime reduction (B) |£4K |£20K |£30K |£54K |
|Cost of software and implementation (C) |£25K |£8K |£3K |£36K |
[pic] (Or 50% ROI over the three year period)
(The software and implementation costs used are currently typical for a good, 6 to 10 seat CMMS system. This would generally be sufficient for an organisation of this size.)
It is easy to see that quite often the overtime factor alone can yield sufficient ROI. Remember that this is taken in the context of the overall cost of the CMMS versus just one potential saving.
Example 2 - ROI from Equipment Availability - Downtime Reductions
Still with us? OK, let's now have a look at a typical equipment downtime scenario. If the cost of downtime in a continuous process plant is £10K per hour and the plant experiences an average 30 minutes downtime per week the cost will be £5K per week or approximately £250K per annum. Realistically CMMS implementation may be able to initially improve the equipment maintenance procedures such that this can be reduced to 26 minutes per week, a 13.33% reduction through the first year. This equates to a saving of £33.33K so using this figure along with the same first year implementation figure as in our Example 1 we get the following result.
[pic] (Or 33.3% ROI over one year)
Example 3 - ROI from Staff Optimisation and Productivity Improvements
Any good CMMS implementation will result in better staff utilisation and productivity improvements. In our final example (using the same staff costs as in example 1), we may realistically aim to reduce our technician head count by 10% (or two technicians) after the first year. This would realise savings of £40K during a two year period.
We'll look at savings over a period of two years in this case.
| |Year 1 |Year 2 |Total |
|Benefits through head count reduction (B) |£0K |£40K |£40K |
|Cost of software and implementation (C) |£25K |£8K |£33K |
[pic] (Or 21.21% ROI over two years)
Clearly, if all three of the savings illustrated above could be realised in the same plant, the benefits of the CMMS implementation would be very substantial. These methods should allow most maintenance managers to present an irresistible case for CMMS implementation.
Bryan D Weir is the Principal Consultant with Perspective CMMS, the leading, UK based, independent CMMS consultancy. Contact him via email at bweir@pemms.co.uk. (pemms.co.uk)
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