One of the first and most commonly asked questions Solution Minds Consulting receives from Organisations thinking of implementing a new ERP is; “how much does a new ERP system cost?”
The answer is not quite as straight forward as most would prefer, “It depends on a number of factors”
There are a range of factors to consider when budgeting for an ERP system, this write up will focus on the factors and estimates on pricing most common to mid-market finance and ERP systems and not necessarily Tier 1 (high-end) or Entry level solutions.
Key Factors that Contribute to the Cost of a New ERP System
1. Software Licensing Costs
Software licencing costs is the most obvious factor that contributes to the overall cost of a new ERP.
ERP Software packages can either be purchased by organisations under a subscription basis, or a full packaged on-site solution. In either case, both packages are commonly priced on a per-user cost model.
Generally, these per-user cost models are either on a per concurrent user or named user basis. A concurrent user licencing model is licenced to allow multiple people to share a user licence if needed, whilst a named user is one licence per system user. Therefore, the size of your organisation and the number of people using the ERP system will impact the overall cost.
For a mid-market solution, the cost is typically anywhere from $200-$1500 per user, per year for subscriptions based software, or a one off cost $1000-$5000 per user for full packaged on site solutions.
Most ERP vendors are willing to package software licencing costs for high volumes of users at a discount rate in order to secure your business, but renegotiation and scope creep can reduce any benefits gained. This highlights the importance of defining who will be using a system and for what functions prior to selecting and implementing an ERP system, as additions to scope and licencing will impact the overall costs.
2. Hardware and Hosting Costs
The cost of IT infrastructure, hardware and hosting, that is needed to support the new ERP system, is another cost that needs to be considered.
Most on premise ERP systems will have a minimum server requirement. Therefore, if your organisation does not meet the stringent minimum requirements of a modern ERP, this is an additional cost that you may need to factor in.
In addition to the cost of ensuring servers are capable of meeting the minimum requirements of a modern ERP regardless of whether it is on premise or on the cloud that you may also need to factor in is the cost of additional workstations or mobile devices. Especially if your planning on a larger number of users than previously, or your organisation is looking at taking advantage of new mobile technologies and off site functionality.
If you happen to be looking at a cloud based ERP, the cost of hosting your ERP could also be an additional cost on top of an annual subscription, especially if you are looking at having a dedicated hosting location in order to meet security requirements.
Finally, if you are planning on taking advantage of other functionality that requires peripheral devices, such as barcode scanners and sensors, then the cost of these devices need to also be considered as part of the overall cost of the ERP solution.
3. Implementation Costs
The largest component to the variable cost of a new ERP system is the cost of the implementation. At the cost of implementation really boils down to the complexity and duration of the implementation effort. The longer and more complex the implementation the higher the cost.
The most common factors that impact the duration and complexity of an ERP implementation are:
- The functional requirements of the organisation
- The degree of integration that may be required to other systems or third party applications
- People Costs (Which will be covered in section 4)
ERP systems that do not fully support the key functional requirements of an organisation will either need to be customised or supplemented with third party application to meet the needs of your organisation.
Customisation is one of the biggest taboos in the ERP industry for organisations, vendors and implementation partners alike, because it increases the commitment need from system resources and your own resources to design, develop and test functionality that the system was not initially designed to have. The cost of having these additional resources performing these activities depends on the complexity of the customisation needed, and as such detailed requirements need to be defined and critically analysed before any commitment is made to a customisation.
Integrations can be just as difficult as customisation, especially if the integration is into a system that the ERP system has not had any previous integrations to before. This is because, design, development and testing of integrations needs to be added to the overall implementation budget. This is why it is recommended that if integrations to best of breed systems are needed and identified early, that a native or past integration with these systems be a selection, criteria for your new ERP because it theoretically should be cheaper than developing an integration from scratch.
4. People Costs
Apart from the cost of external resources such as consultants, the most overlooked cost of implementing a new ERP system are the people costs of an implementation. Typically, organisations will focus on the hourly or daily rates of system consultants tasked with setting up the system and possible external project, training and change management resources however, what is commonly missed is the cost to the business to dedicate their own internal resources to the project.
External consultants are not cheap, so the more reliant an implementation is on the use of their services the more expensive the implementation may appear to be. However external consultants hold a wealth of knowledge and experience that may not otherwise be available and in ideal cases will reduce the overall time spent on a project as oppose to trying to do a DIY implementation. These considerations need to be balanced out when budgeting for an ERP system. Typically, the implementation service costs are around 2x the cost of licence fees.
In addition to external consultant costs organisations should also take into account the likely costs of using internal resources. Many organisations are resource constraint and as such feel that they cannot afford to resource staff onto projects without impacting the day to day operations of their organisation. Therefore, with this in mind, it is advised that a backfill amount be budgeted into the costs to cover key resources in the business so that they can be involved in the implementation. This is important from both a functional fit perspective and a change perspective.
Functionally, internal resources will better understand the workings of the business and their input is vital to ensuring that the functional requirements meets the needs of the business. From a change perspective, if internal resources are not involved, resistance to the new system increases. This is because change coming from consultants is perceived as being forced onto the workforce, however change championed internally is perceived as being driven by the workforce.
Furthermore, the implementation of a new system means that new ways of working need to be learnt and adopted and as such training should also fall part of the budgeted implementation. To ensure that at the very minimum, people will be able to know how to do basic tasks in the system before it is turned on. Furthermore, the more complex a system the more change management and training is required. The better the training and change management, less of a learning curve there will be and as such a faster return on investment. This is because less time is wasted accepting the system, knowing how to use it and then become proficient in its use.
Studies conducted by Prosci of over 822 organisations worldwide in 2014, found that on average organisation spent between 10%-25% of the total project cost on change management activities.
5. Ongoing Costs
In addition to the cost of licencing and implementing a system, organisations should also prepare for the on-going costs associated with the new system.
For systems that are on premise, one off licence packages, there is usually a yearly maintenance fee that needs to be paid to the system vendor for ongoing support services and patches. There are also the costs of each major up-grade cycle that should be factored in, because if on premise solutions are not regularly upgraded functionality becomes out dated and support for out dated software is limited.
For subscription and hosted packages, there is the yearly subscription cost for all the license and any hosting fees associated with these. Up-grades for these packages are not an issue, because in full cloud solutions, users on a subscription model will always be on the most up to date version.
ERP Systems are significant investments, Do you want to maximise your ROI?
As you can see the total cost of a new ERP system depends on a lot of variables and the variables above, are by no means exhaustive.
Getting a new ERP system is a significant business investment. Therefore, as with all investments, it may be of benefit to consult with independent consultants to assist you with deciding if a new ERP strategy is for you, and if so, what ERP system would best meet the needs of your organisation and assist you with keeping the implementation of the new ERP system on track.
Want to know more…
CEO and Founder – Solution Minds Consulting
Mob: +61 400 729 559