Using technology to improve the way you do business
By Michael Burns
Buying an ERP system is a lot like buying a house. The process brings all kinds of unexpected costs. When I moved into my first home, we couldn’t get the bed up the stairs, so we had to remove part of the ceiling, which ruined the fresh paint. Then the plumbing failed and most of the pipes had to be replaced. If only we had known.
When it comes to ERP, companies spend plenty of time haggling over the purchase price but don’t nail down the other costs — maintenance and support, implementing the system, up-grades and the people involved internally in implementing the new system.
In 2006, we ran an article based on a customer survey of ERP systems (see www.camagazine.com/roundup2). It included the cost analysis in “2006 ERP costs.”
To see whether the chart still holds true, let’s look at approximately how much a new midmarket ERP system will cost over three years for a company that is investing today. The going rate for licence fees averages about $3,000 per user. If the company has 50 concurrent users, the software licence cost will be $150,000. Maintenance costs range from 15% to 22%. Let’s take 18% or $81,000 over three years. As a rule of thumb, implementation fees will be about the same as licence fees or somewhat higher depending on the complexity of the system and whether the organization will be able to use it without much tweaking. For our example, let’s assume a 1.2:1 ratio, or $180,000. Infrastructure costs are generally the lowest costs to consider in an ERP investment, partly because hardware and network prices continue to fall and partly because most organizations try to keep their computer equipment up to date to avoid downtime. For our example, we’ll say $40,000 is required for a few servers and an upgrade to some of the PCs. An ERP implementation will also require key people in the organization to set aside their usual day jobs to focus on the implementation. We will have one dedicated project manager and five subject matter experts who will be working 25% on the implementation for a year. Their average annual salary is $80,000, including overhead. The internal costs are then about $180,000.
Recapping, we have “2011 ERP costs.” The relative percentages are fairly consistent with the midmarket costs from 2006. Licence fees might have fallen a bit because of competition. We would expect infrastructure costs to have fallen as well. The biggest variance is with internal costs. Our theory is that many organizations don’t calculate the costs of the employees used in the implementation unless those employees are backfilled by temporary employees.
Our analysis did not include software as a service (SaaS) systems, which have a different costing model. With SaaS, you pay a monthly fee for each user on the system rather than buying a licence. SaaS vendors provide hosting services — your data resides on their servers and their IT staff look after it. So you save money on equipment and technical resources. SaaS is also considered a type of cloud computing, which is what all the major software vendors are talking about these days (see next month’s feature on cloud computing). You can expect to see many more vendors offering SaaS costing models in the future.
One objective in implementing ERP systems is to avoid cost overruns, which unfortunately occur all too frequently. It’s a good idea to ask the vendors to define the scope based on detailed requirements and to specify a fixed price for implementation. It might be necessary to pay the vendor for this fixed price before purchasing the software licence. However, paying beforehand puts you in a much better position to negotiate costs for tasks that would normally be done as part of the implementation. You will also know that once your system is in place, you should be able to settle in with no thoughts of moving from it.
Michael Burns, MBA, CA.IT, is president of 180 Systems (www.180systems.com), which provides independent consulting services, including business process review, system selection and business case development. Contact 416-485-2200; email@example.com