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.
4 thoughts on “ERP Cost Estimates”
The reason why cost estimations are not reliable are:
First: One starts from the wrong assumption that ‘THE ERP SYSTEM’ exists and that it has a ‘PRICE’. This is not the case. The traditional players do their best not to give transparent information.
Second: the so called ‘INDEPENDENT’ consultants should be in a position after a couple of meetings to know your problem in depth and to evaluate their proposition in relation with all the available ERP on the market. This universal knowledge is not available. Sometimes the term ‘INDEPENDENT’ just means ‘INCOMPETENT’.
Third: Future ERP users just love to believe that without doing their homework they can do some shopping and come home with the right product for the BEST PRICE.
Fourth: ERP is not ‘moving to another bookkeeping package or sales/purchase order system’ but find a viable solution for your real problems. Since bookkeeping, sales and purchase systems exist for more than half a century they should be free of charge. There is no added value anymore.
The SUM of all this is a fundamental feeling that ERP cost too much and will not deliver an effective solution for your money.
The ballpark estimations do not help you for all of the reasons mentioned before but also because there are more and more products that do not relate on the license fees like the traditional players do. (Cloud ERP ….). So:
1. Forget the independent consultant and traditional solutions.
2. Do your homework, the better you know what you want, the better the cost estimation.
3. Engage with a reliable partner. They are rare but they do exist.
The source of the problem lies in both the camps: The traditional players (ERP solutions and Consultants) love an non transparent market place and the traditional customer keep on believing that he can buy a solution (fixed price) for a problem that he has not clearly specified.
This can be better.
A couple of comments from one who has been budgeting and implementing Erp systems for the last 20 years.
– Because Erp market is so mature you can find pre-configured solutions targeting each different industries that significantly (up to 50%) cut realisation time and costs
– the most critical cost driver for the TCO of an Erp solution is the amount of customisations in the solution
– higher organisation openness in adopting best practices from the proposed solutions translates into lower implementation and maintenance costs
– the multiplication of cloud solutions addressing typical support processes (such as HR and Procurement) is changing radically the cost model (capex to opex)
– do not forget training and change management in your cost estimates. This usually varies from 5 to 12% of the implementation cost and depends on the size of the organisation
– rely on solid system integrators to ensure your Solutions remains simple and then your TCO under control
For me, based on 22 years quoting Tier 2 ERP systems, one of the biggest problems is setting budget expectations. It is rare to find a prospect that has identified a reasonable budget. Further I struggle to find a “lead generating” company that sets the right expectations. Further the advancement in technology adds a level of complexity that comes at a cost. Then there is the buzz around SAAS models that are in reality not cheap, nor the solutions that I refer to as “phase 2 onward” such as warehouse management, bar-coding, web portals, EDI, quality, document retention and other solutions not considered “core.
In my experience whilst years back one consultant could accomplish most of the work, today we need more like 3 persons to accomplish the same thing. One of the reasons is having to fit the ERP to the clients processes versus the client fitting in to the ERP processes.
An interesting article, with many valid points. I am a bit troubled with your rule of thumb though – which unfortunately is the corner stone of your article.
The number of users has a large impact on the license value, and a 30 user system with simple requirements would take little extra implementation effort than a similar 3 user system. Of course, a 30 user system is less likely to have such simple requirements, as higher numbers of users tend to suggest a larger company making use of more areas of a solution with a different opinion on budgets looking to make cost optimisations with less of a ‘make do’ approach, but in which case your ratio has gone up anyway.
I think to give a customer any such cost estimates without a least a preliminary discussion of requirements could lead to unpleasant conversations further down the line, or losing business because a seemingly simple implementation could blow the budget.
You have however caveated all of this with your first sentence, which does very much hit the nail on the head – ‘Buyer Beware’. Make sure that the vendor has a good idea of your requirements, prepare a short requirements document to present to vendors, and ensure their ball parks are based on that – that gives you some confidence before committing to a Functional Requirements exercise, which should be carried out before committing to the project.
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