ERP Insights

What to Know About ERP Implementation Pricing

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ERP system acquisition and implementation projects often overrun their budgets, take longer than planned, end without achieving their full objectives, and/or the systems don’t deliver the expected benefits. But it doesn’t have to be that way.

In this article we cover

How Much Does an ERP System Cost?

Any company considering the acquisition of an ERP system, whether for the first time or as a replacement for an inadequate or under-performing system, will want to know how much it will cost. While there are some general ranges, it is important to know that the price will vary based on the size and location of the company, the range of applications included in the bid, the complexity of the implementation process, which other vendors are competing for the business, how much the vendors want the business, and other factors. 

While some ERP providers do list their prices openly, many do not. And even those posted prices can be adjusted in some circumstances. More importantly, the price of the software is just a part of the cost of implementing a new ERP system. The cost of installation, implementation, consulting assistance, and user training can easily exceed the cost of the software.

ERP Software Pricing Models

For a traditional on-premise system, expect to pay for an application software license, computer and related hardware, system software and utilities, installation and implementation services including data conversion and software tailoring, user training beyond what may be included in the license purchase, and implementation support (consulting). An old rule-of-thumb says that the total should be about evenly split between hardware, software, and services. Hardware costs continue to decline while service costs tend to increase, so adjust those percentages accordingly.

For a traditional on-premise system, small companies should expect a total cost between $20,000 and $200,000. Mid-sized companies typically spend $150,000 to $750,000 or more. These ranges are so broad as to be useless but that’s the nature of the business – each company and situation is unique. That said, it makes sense to look at system costs on a lifecycle costs basis. Estimate the total purchase, implementation, support, and maintenance costs for a reasonable period of time – 5 to 7 years – to budget what your all-in costs will be then compare that to the benefits to determine the return on that investment.

The costs of cloud-based ERP systems are structured very differently. The main difference is that cloud systems are typically offered on a subscription basis called Software-as-a-Service (SaaS). There is little in the way of up-front costs for hardware, software, and installation, but companies still have to budget for implementation services and user training.

The SaaS subscription price, an operating expense rather than a capital expenditure, includes not only the software licenses and ongoing support and maintenance but also the same for hardware and IT support. In other words, the subscription cost includes almost everything needed to deliver and maintain the systems and software. Lifecycle costs for cloud-based and SaaS ERP over 5 to 7 years are usually about equivalent to on-premise system costs. Most companies choose a cloud-based ERP for reasons other than cost, which are many and are not addressed in this article.

ERP Pricing Graphic
ERP Software Pricing Model

ERP Software Modification

Any discussion of ERP costs must include some words about implementation and address the issue of ERP software modification. The entire software selection process is aimed at finding the software that best fits the company’s needs. And software vendors dedicate much of their development efforts on adding functionality to make the system more useful and attractive for a wider pool of prospects, as well as adding flexibility so that their systems can be tailored to better fit customer needs and preferences.

Some companies insist that their processes and needs are so unique that they must change or add to the software to make it fit. However, modifying the software should be a last resort – to be avoided if at all possible. Today’s systems are highly tailorable and can be adapted to meet a wide range of needs and preferences. The risks of modifying vendor-developed software include

· significantly increasing the total cost of the ERP system,

· delaying the time-to-benefit (implementation and use of the system require development and testing first), 

· greatly increasing support costs – maintaining custom codes and any programs they touch in the system are required. Routine updates from the vendor change from a minor inconvenience to a major software project, and

· jeopardizing the built-in security and integrity of the vendor-supplied system – especially dangerous if the system is subject to audit by any outside regulatory agency.

The list goes on but should be enough to help decide whether modifying the system is worth it or whether being a little flexible and adapting processes makes more sense to take advantage of the best practices embedded within the packaged ERP software.

ERP Solution Implementation

One of the biggest, somewhat hidden, variables in a vendor’s bid for a new ERP system is the amount and extent of support they include in the bid or recommend for the implementation of their system. 

In a competitive bid situation, it can be tempting to downplay implementation costs to make the bid (total system cost) more attractive. This is a case of caveat emptor - buyer beware. When evaluating competing bids, be sure to normalize them by making the proposals for implementation services – data conversion, system installation and tailoring, user training, testing, and verification, etc. – equivalent before comparing total costs.

One of the places where costs can be easily underestimated is in user training. Whatever is budgeted for user training and education, double it and make sure to spend it all. It’s the best investment companies can make in getting the most out of an ERP system investment. Far too often, key people (those that need it most) are lured away from scheduled classes and training sessions by operational demands that are considered more important. And the training is hardly ever rescheduled or made up in some other way.

Ownership Interest Equals ERP Success

ERP system acquisition and implementation projects often overrun their budgets, take longer than planned, end without achieving their full objectives, and/or the systems don’t deliver the expected benefits. But it doesn’t have to be that way.

Go into the project with eyes open. Set realistic expectations and reasonable time and cost budgets. Treat your system and services suppliers as partners in the ERP journey and not just vendors. Don’t skimp on consulting advice and assistance, and by all means, don’t skimp on education and training for any users. Keep the entire team involved in the process from initial project scope and justification, requirements definition, and supplier selection through installation, implementation, and ongoing use and upgrades.

Be sure to cultivate an ownership interest in all of the system’s users for the system’s success. The easiest way to develop that ownership is to involve everyone in the planning, selection, and implementation process from the very beginning.

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