Introduction
When companies start looking at Enterprise Resource Planning software they usually focus on the software features, dashboards, automation and costs. Vendors often show plans or prices making it seem like a simple investment.
Business leaders who have experience know that the software license is just a small part of the total cost.
The real cost goes way beyond buying the software. Things like setting it up moving data training employees getting the equipment connecting it to other systems keeping it maintained and ongoing support all add up to the total investment.
Knowing the cost of owning ERP helps companies avoid going over budget get approval from executives and make smart decisions, about technology for the long term.
This guide will go over every cost involved in owning ERP and show how businesses can predict expenses accurately while getting the most out of their investment.
What Is ERP Total Cost of Ownership?
| Cost Category | Examples |
|---|---|
| Direct Costs | Software licenses, subscriptions, hardware |
| Implementation Costs | Consulting, setup, integrations |
| Operational Costs | Maintenance, support, monitoring |
| Human Costs | Training, change management |
| Future Costs | Upgrades, expansions, new integrations |
The total cost of owning an ERP system is the cost of getting, putting in running, keeping up and eventually replacing the ERP system throughout its entire life.
Many companies think about the cost of the software license. Forget about all the other costs that come up when they are putting the system in and running it for a long time.
When you do an analysis of the total cost of owning an ERP system you usually look at these things:
* The cost of the software license or subscription
* The cost of the hardware and the systems that support it
* The cost of moving the data to the system
* Connecting the system to other systems
* Making changes, to the ERP system to fit your companies needs
* Getting help from consultants to put the system in
* Teaching employees how to use the system
* Helping employees get used to the changes
* Keeping the system running and supporting it
* Making the system better. Upgrading it in the future
* The cost of the work that your own employees do and how it affects their productivity
If you do not think about all these things it is one of the reasons that ERP projects cost more money than you thought they would.
Cloud vs. On-Premise ERP: Understanding CostÂ
One of the things that affects how much you pay for ERP is the type of deployment you choose.
On-Premise ERP Costs
Traditional on-premise ERP systems mean your company has to host the software inside its building.
This approach often means you have to pay a lot of money at first including:
* Software licenses that you pay for once
* servers
* Networking equipment
* A place to put your data center
* Database licenses
* Backup systems
* Cybersecurity infrastructure
* IT staff for ERP
You have complete control over your environment but you have to invest a lot of money at first.
Benefits of On-Premise ERP
* You can customize it however you want
* You are in control of your data and infrastructure
* You own the software licenses for a time
Challenges
* You have to pay a lot of money at first
* You have to maintain the hardware
* You need IT staff to manage it
* Upgrades can be
Cloud ERP Costs
Cloud ERP solutions work on a Software-as-a-Service model, where the vendor hosts and manages the system.
Of paying a lot of money at first businesses pay monthly or annual fees.
Typical cloud ERP expenses include:
* Fees based on how users you have
* Extra costs, for storage
* Premium support plans
* Integration services
* Consulting for implementation
Benefits of Cloud ERP
* You do not have to invest a lot of money at first
* You can start using it
* The software updates automatically
* You do not need much infrastructure
* The vendor manages security for you
Challenges
* You have to pay subscription fees every month or year
* You might pay more in the run
* You need internet to use it
For many growing businesses cloud ERP is easier to start using and can grow with you.
Hidden ERP Implementation Costs
Implementing an Enterprise Resource Planning system or ERP implementation is usually the expensive part of the whole project.
It costs a lot of money.
Many companies do not realize how work it takes to change the way they do business move their data to the new system and teach their employees how to use it.
Data Migration Costs
The ERP system is only good if the data it has is good.
Before the company can move the data they usually have to do a things. They have to:
* Clean duplicate records
* Correct inaccurate information
* Standardize data formats
* Remove records
* Validate historical transactions
Getting the data ready often takes a lot of time from the people who work at the company and from outside experts. It can take hundreds of hours. The company needs to make sure the data is good before they can move it to the ERP system.
Legacy System Integration Costs
Most companies use a lot of software programs not just the main one they have.
Common integrations include:
* CRM systems
* Payroll software
* Human resource platforms
* E-commerce applications
* Warehouse management systems
* Shipping and logistics software
To make all these systems work together smoothly you often need tools, like middleware, APIs, custom development and you have to keep maintaining them.
These Legacy System Integration Costs are often not thought about enough when planning a project.
ERP Customization Costs
New ERP systems are made to follow what works best in each industry.
Sometimes companies want to make changes so the system works like they already do things.
While making these changes might seem like an idea at first it often causes problems in the long run like:
* Higher development costs for the ERP system
* Longer time to get the ERP system up and running
* Complicated upgrades for the ERP system
* Higher expenses to keep the ERP system working
* Needing developers who know the ERP system very well
When you can it is usually cheaper to change your business processes to work with the standard ERP system rather than making a lot of changes, to the ERP system itself.
ERP Consulting and Professional Services Costs
When you implement an ERP system you need people who really know what they are doing. Most of the time the people who work for you do not have the right skills.
So companies usually get help from people who specialize in implementing ERP systems and from ERP consultants.
The services these professionals offer can include:
* Project management
* Business process analysis
* Solution architecture
* Configuration
* Custom development
* Training
* Quality assurance
* Go- support
The cost of hiring these professionals can vary a lot depending on how good they are and where they are from but it is usually a big part of the budget for the ERP system.
If the project takes longer than planned the cost of hiring these professionals can go up a lot so it is very important to manage the project
The Hidden Cost of Internal Resources
A lot of the time the budget for an ERP system does not include the cost of using the companys employees.
To make sure the implementation goes well you need people from inside the company to be involved, including:
Department managers
Finance leaders
Operations teams
Inventory specialists
Human resources personnel
Executive stakeholders
These people are experts in their fields and they have to spend a lot of time:
Reviewing workflows
Testing processes
Validating data
Attending workshops
Approving system configurations
Because of this the companies productivity might go down for a while and they might need to hire temporary staff or pay their employees to work overtime so that the day, to day work can still get done.
ERP Training and Change Management Costs
Technology is not enough to guarantee success on its own.
Even the best ERP system can fail if employees do not know how to use it
Why Change Management is Important
ERP implementations often change how employees do their jobs.
Without communication and support people may resist change and slow down the project.
Effective change management includes:
* Internal communication campaigns
* Getting employees involved
* Leadership support
* Documenting processes
* Training programs based on roles
* Employee Training Investments
Good ERP training may involve:
* Workshops led by instructors
* learning modules
* Video tutorials
* User manuals
* Guides specific to departments
* Train-the-trainer programs
Companies that invest a lot in training usually see:
* Faster adoption of the ERP system
* Higher productivity from employees
* Fewer errors from users
* Better return on investment
Training should be seen as an investment, not an extra cost.
Post Go-Live ERP Costs
Many businesses think costs go down a lot after implementation.
Erp ownership costs continue throughout the systems life.
ERP Maintenance and Support Costs
Ongoing support may include:
* Software updates
* Bug fixes
* Security patches
* Monitoring performance
* support
* Updates for regulatory compliance
For on-premise systems annual maintenance fees are often between 15% and 22% of the original software license cost.
Cloud ERP providers usually include maintenance, in subscription fees. Premium support plans may cost extra.
ERP Upgrade Costs
Technology is always changing so we need to upgrade our systems and then to keep them working well and safe.
When we do an upgrade we have to pay for some things, such as:
* Testing environments
* User acceptance testing
* Customization validation
* Integration verification
* Training updates
Companies that have made a lot of changes, to their ERP systems usually have to pay a lot more to upgrade than companies that use the features of their ERP systems.
Strategies to Reduce ERP Operational Costs
After things have settled down companies should always look for ways to reduce the money they spend on ERP.
Here are some good ways to do this:
* Check Who Is Using The System Regularly
We should get rid of accounts that are not being used and change the licenses that people do not need.
* Use Machines To Do Routine Jobs
If we use machines to do tasks people will not need to ask for help as much and they can do some things on their own.
* Teach People How To Use The System
When people know how to use the ERP system they make fewer mistakes and need less help.
* Get Rid Of Old Systems That Are Not Needed
If we stop using systems that do the same thing, as our ERP system we will save money on licenses and maintenance.
* Make Sure Everyone Does Things The Way
If we all follow the same steps to do our jobs it will be easier to get help when we need it and we will not have to change the system as much.
How to Calculate ERP Total Cost of Ownership
Organizations should use a structured ERP TCO model to forecast costs accurately.
A comprehensive ERP cost analysis should include:
Direct Costs
- Software licenses
- SaaS subscriptions
- Hardware
- Infrastructure
- Consulting fees
- Support contracts
Indirect Costs
- Training
- Productivity loss
- Change management
- Data cleansing
- Internal labor
Future Costs
- Upgrades
- Expansion projects
- Additional integrations
- Increased user counts
Most organizations benefit from evaluating ERP costs over a five-year period, providing a realistic view of long-term ownership expenses.
Measuring ERP Return on Investment
| ERP Investment Area | Potential Business Benefit |
|---|---|
| Automation | Reduced manual work |
| Inventory Management | Lower inventory carrying costs |
| Financial Reporting | Faster month-end close |
| CRM Integration | Improved customer retention |
| Supply Chain Visibility | Better forecasting |
Understanding how much things cost is important. What executives really want to know is if the money they put into something is going to give them something back that they can actually measure.
Executives want to know if the investment in Enterprise Resource Planning generates value.
Common Enterprise Resource Planning return on investment metrics include:
* Inventory Optimization
When we do this we can make guesses about what we need to stock up on so we do not have too much extra stuff just sitting around and that means we have more money to use for other things.
* Labor Efficiency
When we use machines to do things people do not have to work as hard and they can get more done.
* Reduced Software Costs
When we use one Enterprise Resource Planning system of a lot of different ones we do not have to pay as much for licenses.
* Improved Customer Service
When we can get orders to people faster and they can see what is going on they are happier. They keep doing business with us.
* Faster Financial ReportingÂ
When reports are automatic it does not take long to get everything sorted out at the end of the month or year.
When all these good things from Enterprise Resource Planning are more than the cost of owning it then organizations get a good return, on their Enterprise Resource Planning investment.
ERP Budgeting Best Practices
You need to have control over your money when you are working with ERP. This is really important for keeping costs under control.
Here are some things you can do:
* Establish a Contingency Budget
This means you should save some money, like 15% to 20% of your budget for things that you do not expect to happen.
* Control Scope Creep
When someone wants to make a change you should think about it carefully. See if it is really necessary. Try to use the things that come with ERP whenever you can.
* Use a Phased Rollout Approach
Of trying to do everything at the same time you should do it a little at a time. This means you will deploy some parts of ERP and then add later.
* Maintain Executive Sponsorship
It is very helpful to have someone, in charge of your project. They can help you if there are problems and make sure everything keeps moving.
* Track ERP costs all the timeÂ
You should always be checking to see how money you are spending compared to what you planned to spend. You should do this from the start of your ERP project to the end.
| ERP Cost Area | Typical Budget Impact |
|---|---|
| Software Licensing | 10%-20% |
| Implementation Services | 30%-40% |
| Data Migration & Integration | 10%-15% |
| Training & Change Management | 10%-15% |
| Support & Maintenance | 15%-20% |
| Contingency Reserve | 15%-20% |
Conclusion
ERP software is an important thing for a business to buy but to really know how much it will cost you have to look at more than just the cost of the software itself.
The total cost of owning ERP software includes things like putting it in connecting it to systems the equipment you need to run it teaching people how to use it getting advice from experts keeping it running making it better and helping people use it every day.
Businesses that think carefully about all these costs before they start using ERP software are in a position to not spend too much money to get their employees to use it and to get the most value out of it in the long run.
By thinking about all the costs of ERP software making sure everything is done correctly and always trying to make it better businesses can make their ERP software a powerful tool to help them grow be more efficient and beat their competition.
A good plan, for ERP software does not just help control costs it helps a business succeed in the run. ERP software is a part of this and a good ERP strategy is very important for a business to be successful.
