News & Views | Business Case

News & Views is published monthly by 180 Systems. Our objective is to provide recent articles to our readers on business technology topics. In some cases, our blog contains a title with a hyperlink to a source article, a quote from the article and our comments. In other cases, we have provided a blog without a hyperlink for original content by 180 Systems. We encourage you to post your own comments. You can also access our blog by topic.

ERP Cost Estimates

Business Case, Contract Negotiations, ERP, Software Selection

Buyer beware when estimating the costs of an ERP implementation. There are so many unknowns that make it really tough to avoid unpleasant surprises. The vendors are very reluctant to fix price anything when it comes to the services required because of the many unknowns – scope of work, who does what, capabilities and available time of buyer resources…. It’s especially difficult for the vendors in the early stages of the selection process. At the same time, the buyers want to have a decent ball park of costs before pursuing a potential solution.

But there are guidelines that will help. When it comes to license or annual fees, it’s fairly easy to come up with a number as it’s based on number of users and high level scope. You should be using a rule of thumb for the implementation services which can be estimated as a ratio of implementation to license fees as follows:

  • 1:1 for a straight forward implementation with relatively simple requirements
  • 1:5:1 for an implementation with some complexity of requirements and little or no customization
  • 2:1 for an implementation with a lot of complex requirements and some customization
  • 3:1 for an implementation with a lot of complex requirements as well as a lot of customization

Other costs to consider:

  • Maintenance – the vendors will provide a % but make sure that it includes adequate levels of support. The vendors have been pushing their maintenance %’s ever higher despite the competition. Assume at least 20%.
  • Travel – it can be as high as 15% of implementation fees
  • Upgrade fees – many systems that are installed on premise or on private clouds will have upgrade costs every few years which should be a small % of the implementation fees.
  • Internal costs – you need to know who will be involved and the extent of their time as well as their approximate cost to the company
  • Legal fees
  • Infrastructure changes – you need to get an idea of the recommended infrastructure for the new system and what it will cost to acquire and install it.
  • Consultant fees – you may want some coaching services from a company like 180 Systems.
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Technology investment survey (ERP, CRM and BI)

Business Case, ERP

June 1, 2015 from CPA Magazine and written by Michael Burns – “Making a business case for technology investments is challenging – and potentially career limiting. Anything you can learn from our peers’ experience in making these investments can be helpful in crafting a case. That is why we decided to run our own IT satisfaction survey in CPA Magazine. It ran from January to April 2015, and is available by clicking here.

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BI, CPM, and budgeting survey 2015

Business Case, Business Intelligence, CPM

June 1, 2015 from CPA Magazine and written by Michael Burns – “Every year, we reach out to vendors of BI, CPM and budgeting systems to see where they are headed. Last year, some of the big trendsetters were big data, mobility, cloud computing and in-memory processing. Those technologies are still very much with us. But this year, we’ll go back to basics and see whether there is a business case to invest in BI and CPM systems in the first place…”

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Technology investment survey

Business Case, Business Intelligence, CRM, ERP

January 1, 2015 from CPA Magazine by Michael Burns – “We all hear the bad news when a vendor is sued over a failed implementation. When this happens, we assume there are many other unhappy customers whose experiences do not get broadcast, because most companies would rather not litigate. But are there also many happy customers? And what makes a happy customer?  We have a created an online survey to determine just how successful — or unsuccessful — technology investments turn out to be…”

180 View – The survey which can be found by clicking here is for ERP, CRM and BI. Questions will include which industry, company size, system, type of system, costs of system (by license, implementation, hosting fees, maintenance and support, and internal costs), satisfaction with implementation, satisfaction with benefits and lessons learned. The goal is to determine the satisfaction of these investments and to see whether there is a correlation to industry, company size, the system or type of system. Stay tuned.

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Maximizing enterprise resource planning ROI: A guide for mid size companies

Business Case, ERP

April 2010 from IBM – “To determine the ROI, calculate the total costs of your solution by including components such as software, hardware, upgrades, support, maintenance, training, customization, implementation services and more. Compare those costs with the tangible benefits the investment will provide and you will have your ROI. Tangible benefits could be in the form of process improvements enforced by the ERP that have helped your company improve its efficiency, or a rise in revenues or profits because you were able to identify new opportunities.”

180 View – We recently received a link to this article so we have assumed IBM thinks it’s still current thinking. The inconvenient truth with the article and with so many vendors’ promises is that most ERP systems don’t have a positive ROI. However there can still be compelling reasons to invest in a new ERP system without having ROI (such as the old system is no longer supported) and there can be intangible benefits that can justify the expenditure. Also when adding up the costs, don’t forget to include internal costs as IBM has conveniently not specifically included above.

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Technology hype vs. reality: How to tell the difference

Business Case, IT Strategy

August 13, 2012 from Computerworld – “There’s one thing everyone working in enterprise IT agrees about: Technology for its own sake is bad. Every new product you adopt has to bring a business value to your organization, either by reducing costs or otherwise improving the bottom line.

Sounds great, in principle. In practice, every technology vendor has a detailed explanation of how each of its products will help your company. It’s up to you to figure out which ones really will. Here are five questions that can help, courtesy of Rebecca Wettemann, vice president at Nucleus Research, which specializes in measuring the ROI of technology projects…”

180 View – The 5 questions were good especially the one “Will it pass the Mom test?”

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7 Steps to Building a Business Case for ERP

Business Case

October 13, 2011 from Supply Chain Management Review – “To create a business case for an ERP investment and select the right ERP option, organizations should follow a 7-step process:

  1. Describe the business challenge
  2. Assess the potential benefits of the ERP investment
  3. Assess the potential costs of each ERP option
  4. Assess risks and issues that might arise during the implementation
  5. Recommend the preferred solution
  6. Describe the implementation approach
  7. Measure potential and actual ROI…”

180 View – The article gives examples of challenges, benefits, costs and risks associated with ERP.  However anyone following the advice given is likely to fail making a business case to any CA or CPA. Accountants have been trained as auditors to not believe anything unless there is credible support for the numbers. So don’t throw numbers around without stating your assumptions and backing it up with credible support. As well accountants recognize the time value of money so you want to do a cash flow over at least 5 years and base ROI on Net Present Value. Finally most business cases have a negative ROI – look for intangible benefits that are linked to Critical Success Factors – what an organization must do well in order to be successful.

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Avoiding project death by ROI

Business Case

February 6, 2011 from The Enterprise System Spectator – “…My hypothesis is that, due to a reluctance to say “no” directly, ROI calculations are often a convenient way to refuse projects that management simply doesn’t want to do. This “ROI trap” can take several forms:

  • Management argues the project budget is underestimated
  • Management argues the benefits are overly optimistic
  • Management argues the benefits cannot be connected to the proposed initiative…”

180 View – We disagree. The so-called traps are in fact exactly the questions management should be asking. Often the people who are driving the project want it to proceed for personal reasons. I say bravo to the hard-ass decision makers who ask the tough questions.

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ERP: Is High ROI and Low TCO Possible?

Business Case, ERP

December 2010 from Aberdeen Group – “…The focal point must now expand to include Return on Investment (ROI) of ERP projects in order to justify continued investment and maximize business benefits. What can the average company expect to pay for ERP and the resultant business benefits that can be derived from a successful implementation? Read this valuable and insightful Aberdeen Report…”

180 View – The article does provide some interesting information including average cost of ERP by company size. However the respondents purchased their ERP systems on average about 7 years ago so the numbers reported are higher than they would be today for license costs. The article also includes a service to software cost ratio by company size which is also useful information. Aberdeen claims that a 1:1 ratio is the average for most of the implementations. However this ratio is not in line with what we have seen. Vendors are prepared to discount their license but not their implementation services, which tends to increase the ratio. As well, one would expect that more complex implementations would have higher ratios than 1:1. Aberdeen also looks at the benefits of an ERP system and provides other useful information. Although Aberdeen admits that some companies are unable to quantity benefits, they also claim that “Best-in-Class” companies achieved 100% payback on their investments in one year and the majority (60%) achieved it in three years. How they arrived at these numbers is a mystery considering the difficulty of quantifying benefits and the time it takes to implement systems.

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Beyond ROI: Creating Long Term Value Through ERP

Business Case, ERP

December 2, 2010 from Toolbox for IT – “Small and medium-sized companies face significant challenges in implementing company-wide or enterprise-wide solutions. These challenges arise from the scarcity of resources − money, time and people and expertise. And yet the business imperative to implement truly effective systems is even greater, since the technology gap between large and small companies is widening. In response to these challenges, the prevalent thinking among business owners and management is to push ERP vendors to produce ROI measures, most frequently citing statistics such as reduced inventory and inventory carrying costs, reduction in days sales outstanding, or reduced order cycle times. This thinking misses the mark. Not that those metrics aren’t important. It’s just that smaller companies need to think “beyond ROI,” to the strategic long term value that ERP can deliver…”

180 View – Although the author makes a number of good points, the article also misses the mark:

  • The article uses very high level terms to describe going beyond ROI such as “continuous improvement and streamlining of business processes over time”.
  • ROI is equated with metrics such as such as reduced inventory and inventory carrying costs, reduction in days sales outstanding, or reduced order cycle times. Reduced order cycle time may not provide an ROI as you need to quantify it for the purposes of ROI.
  • The suggestions on getting beyond ROI include “Look for a fully integrated ERP solution. Best-of-breed software applications are dead.” This is not true. Many companies choose a best of breed option based on a compelling business case. For example, a company may have complex HR requirements and simple financial requirements and it makes more sense to invest in a best of breed HR system.
  • ROI is hardly ever achieved in a new ERP system. But what can be attained is the achievement of strategic goals which are defined as Critical Success Factors and measured by Key Performance Indicators.
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