Buying an ERP system is a lot like buying a house.
You run into all kinds of unexpected costs. When we moved into our first home, the bed wouldn’t fit up the stairs, so we had to remove part of the ceiling, which ruined the fresh paint. Then the plumbing failed and most of the pipes had to be replaced. If only we had known.
When it comes to ERP, companies spend plenty of time haggling over the purchase price but don’t nail down the other costs — maintenance and support, implementing the system, upgrades and the people involved internally in implementing the new system.
ERP Total Cost of Ownership
The going rate for a mid-market ERP licence fee averages about $3,000 per concurrent user. If a company has 50 concurrent users, the software licence cost will be $150,000. Maintenance costs range from 15% to 22%. Let’s take 18% or $81,000 over three years. As a rule of thumb, implementation fees will be about the same as licence fees or somewhat higher depending on the complexity of the system and whether the organization will be able to use it without much tweaking. For our example, let’s assume a 1.2:1 ratio, or $180,000. Infrastructure costs are generally the lowest costs to consider in an ERP investment, partly because hardware and network prices continue to fall and partly because most organizations try to keep their computer equipment up to date to avoid downtime. For our example, we’ll say $40,000 is required for a few servers and an upgrade to some of the PCs. An ERP implementation will also require key people in the organization to set aside their usual day jobs to focus on the implementation. We will have one dedicated project manager and five subject matter experts who will be working 25% on the implementation for a year. Their average salary is $80,000, including overhead. The internal costs are then about $180,000.
| Cost Type | Amount | % |
|---|---|---|
| License | $150,000 | 24% |
| Maintenance | $81,000 | 13% |
| Implementation | $180,000 | 29% |
| Infrastructure | $40,000 | 6% |
| Internal costs | $180,000 | 29% |
| Total | $631,000 | 100% |
SaaS
Our analysis did not include SaaS (Software as a Service) ERP systems which have a different costing model. With SaaS you pay a monthly or annual fee for each user on the system rather than buying a license. SaaS vendors provide hosting services whereby your data resides on their servers and is cared for by their IT resources and so you save money on equipment and technical resources. Our rule of thumb to compare the license model to the SaaS model is to multiple the annual SaaS fee by 3.
Business Process Review / Discovery
One objective in implementing ERP systems is to avoid cost overruns, which unfortunately occur all too frequently. It’s a good idea to ask the vendors to define the scope based on detailed requirements and to specify a fixed price for implementation. It might be a good idea to pay the vendor for this fixed price before purchasing the software. The vendor will be able to confirm scope especially related to any grey areas where there is some confusion or multiple solutions with a wide range in costs. The vendor will also get an appreciation of how much assistance you need during the implementation to improve the accuracy of their assumptions of roles and responsibilities.