The Hidden Costs of an ERP Software Implementation

What about the costs of an ERP implementation?

Most ERP implementations cost more than the budgeted amount and the reasons are many. To successfully execute these projects in a way all stakeholders feel good about and meet all the objectives, the leadership must have certain qualities that are hugely important – strategic vision, process and best practice oriented operations, technology aware, and have prior experience with similar large projects.

Companies should establish realistic ERP project budgets based on careful detailed planning, taking into account all the factors that impact the pre-, during and post-implementation scenarios.

Here we examine the areas that ERP project sponsors must account for in their budgets and identify hidden costs that most inexperienced implementers often overlook.

Strategic executives buy ERP software to implement a structured and process oriented organization that is based on industry best practices to position the company to scale up for organic and inorganic growth. ERP also eliminates information silos and eliminates proliferation and duplication of systems – thereby improving effectiveness and efficiency while reducing long-term costs as the company scales up.

Major cost categories in an ERP implementation:

Software licensing

The first major check companies will write is for software purchase from the vendor.

Anyone who thinks that software licensing cost is the biggest component of an ERP solution will be in for a rude awakening. It is often the third or fourth highest cost of an ERP project.

Vendors usually price their software licenses based on 2 major factors:

1. ERP modules customer needs to run their business processes
2. Number of users using the software

ERP Software licensing cost may range anywhere from 100K to millions depending on your company size and the factors listed above. Vendors often provide deep discounting to SMBs. (If you are an SMB, I encourage you to learn how to negotiate on software deals and get yourself a great deal. Contact me if you want to learn some of the techniques.)

With the advent of cloud, most ERP vendors are rushing to provide cloud hosted options with fixed monthly fees. I think this is a great option for SMB companies to avoid the headaches associated with hardware, software, installations, upgrades and daily management by letting the cloud application provider handle these. It provides agility and peace of mind.

Unfortunately, software cost may not end with purchasing the core ERP software. Most companies may need additional 3^rd party bolt-on applications to enable complete business processes. Examples of such software include Tax software (ex. Avalara), Specialty forms printing software (ex. CreateForm, FormScape etc), CRM, Integration software, etc.

If you need such 3^rd party software, budget additional software licensing cost to avoid surprises later.

Tip for the CIO/CFO: Negotiate with the vendor for the software purchase at the end of the vendor’s fiscal quarter. The closer you are to a quarter, the higher the likelihood of getting a great deal from the vendor and saving precious money. Sales people are incentivized to make deals to achieve quarterly targets. Call me if you want to know how to negotiate for a great deal.

Hardware and storage

Hardware should typically cost less than software licensing.

Typically, you will purchase new hardware to run all the software components. You will need servers and storage. Hardware may account for only 5-8% of your total ERP cost, so don’t try to run your new ERP on some old hardware. Spend the money on good hardware and storage. When your IT tells you that they need to purchase high availability hardware, say “good”. You need to design high availability for your ERP and this does comes at a cost.

Hidden costs: Ask your IT to make sure the development, test and production environments are on different servers. Combining them on to one set of servers to save money is a bad idea. You will end up paying for it later with down time, inflexibility, upgrade issues, testing issues and performance issues. So hardware architecture and budget should account for the Dev, Test and Production environments at a minimum. Some larger organizations will have additional training environments.