The Hidden Costs of an ERP Software Impementation (Part 3)

In the first post of this series, I listed the major cost categories in an implementation. In Part 2 I began to analyze the cost categories, starting with software and hardware. Let’s continue, this time in regards to the implementation costs of people and travel.

Implementation-related Costs (mostly people and travel)

The move to ERP is a project of breathtaking scope and the price tags on the front-end are enough to make the most stoic manager a little twitchy. In addition to budgeting for software costs, companies should plan for consulting, process re-work, integration testing and a host of other expenses before the benefits of ERP start to appear.

I have managed several systems implementations for large and mid-sized companies over the past 25 years. Several of them were ERP implementations while others were other enterprise software. One thing that is consistent in all these implementations is that the software implementation costs outweigh all other costs, the exception being systems that involve significant hardware changes like retail POS systems.

It is fair to assume that typical ERP implementation costs will run anywhere from 3 to 5 times the software licensing costs. Of course, if you negotiated the software costs very well and only paid a fraction of the normal cost, that does not change the implementation cost and this factor may be much higher (6 to 10 times or more).

A majority of the implementation expenditures will be people cost. This includes external consultants (who you most likely will need to help you implement the software), and your internal team payroll costs.

The primary cost drivers/categories of your implementation will be:

  1. Personnel skills and experience (or lack thereof)
  2. Complexity of your business processes
  3. RICE
    • Reports needed in the new software to run your business
    • Integrations with other internal and external systems
    • Customizations needed to the base software to enable your business processes
    • Enhancements that must be added to enable your business processes
  4. Data conversion
  5. Change management & Training

As you can see, all of these categories are related to the scope of your implementation.

Cost overruns (hidden costs) typically occur due to variety of reasons. I have so many reasons for cost overruns that could have been avoided if only clients as well as consultants followed best practices and sound project management techniques. However, my intention of this series of posts is to discuss the costs and not the reasons for these cost overruns, which I will discuss in another post in May.

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