The split between upfront and recurring payments will vary significantly depending on whether you are buying a license to run on-premise ERP or subscribing to ERP Software as a Service (SaaS). Seven years is quite often the break-even for on-premise and SaaS. However, companies are more likely to use a five-year planning horizon. If so, it may make more sense to instead look at the five-year cost of ownership of your ERP. To get a reasonable comparison, estimate what you will pay over whichever time period you choose, and then divide by that number of years to get an average cost per year. That way, you will get a like-for-like comparison of prices, even when comparing very different options.
The total cost of ownership can be broken down into four general categories: ERP software, maintenance, hardware, staff, and services.
ERP Software Cost
Obviously, the cost of the ERP software itself is a significant component of the overall TCO, and many other costs are related/dependent upon the price of the software. For example, in the traditional on-premises world, ongoing maintenance is often priced as a percentage of the ERP software cost. More indirectly, the complexity of the software will also impact the level of support services needed.
In some instances, the application price is all-inclusive. Still, in other cases, you may also need to purchase middleware separately that is part of the platform/architecture on which the application is built.
For perpetual license on-premises ERP software, the cost is front-loaded, typically regarded as a capital expense (CapEx). Where ERP software is delivered as a service (SaaS), the cost of the software is most often a subscription, which is a recurring expense that can be accounted for as an operating expense (OpEx).
Maintenance is a recurring ERP cost that provides you access to technical support, bug fixes, and upgrades to the ERP software system. This is a cost element that is primarily associated with software that is licensed and run “on-premises.” Where software is delivered as a service (SaaS), including cloud ERP software, technical support, bug fixes, and upgrades are included in the subscription.
There are direct and indirect staffing costs associated with ERP. On the direct side, you may have employees assigned directly to support your business operations. These may be dedicated to ERP full-time, or they may support multiple applications. These tend to be Information Technology (IT) staff, but you may also employ some “super users” with skills that are more business than technology oriented. The burdened cost of any of these dedicated individuals contributes to the TCO.
On the indirect side, you may be able to reduce headcount through efficiencies and automation. If, in fact, you can reduce staff (typically clerical staff), this should directly offset the TCO of ERP. However, more likely, you will be able to free up employees from repetitive, menial tasks for them to work more strategically and add more value. These cost savings may not directly impact TCO but contribute to your return on investment (ROI), which is equally important. This is also harder to quantify, but simple growth statistics without added headcount can be a helpful metric.
The type and volume of services you need to pay for will vary quite significantly, depending largely on the complexity of your business and your installation/implementation.
The kinds of services you may need include:
- Evaluation and selection
- Business process design, which should include mapping business processes to your new ERP software
- Assistance in configuration/setup
- Data migration assistance
- Education and training
These all contribute to the total ERP cost. And don’t forget the one additional service that has historically added significantly to the TCO that you should avoid entirely. That is any invasive customization that involves code changes to the ERP software as we discussed above.