Everything You Wanted to Know About ERP* (*But Were Afraid to Ask), Part 2: What ERP Actually Cost (other than your sanity)

ERP is fun! And exhausting. And complex. And sometimes it makes you question your life choices.

In this installment, we’re talking about what ERP costs.

What does ERP cost?

Since I’m a consultant, I must answer “it depends” – it’s a part of the job. Unfortunately, it’s also true in this case.

This is a complex question with lots of variables. Let’s look at the break down of costs to consider.

Licensing/Subscription

The cost of the software (either via perpetual licenses or a monthly subscription) is often what people are thinking of when the “cost” question comes up.

First, there are the easy things like the size of your company, number of seats/licenses, which modules you need in the ERP system (some modules carry extra costs), and a myriad of other things.

Then, the fun part - the OEM (Original Equipment Manufacturer) relationship, who your sales rep is, your personal negotiating skills, timing of the signature committing to the purchase (quarter and year end time frames can be your friend) – those can all significantly affect your overall total cost of ownership (TCO).

For a mid-to-large ERP system, some numbers I’ve seen are:

• For a perpetual license, $4000-$5000 per seat upfront with 10%-20% of that cost annually for maintenance.
• For subscription/ Software as a Service (SaaS), $100-$200 per month per user or $2000-$2500 per year per user.

Hardware/Infrastructure

This one is an easy one.

Just kidding!

Hardware and infrastructure are another complicated topic and often a driver of the cloud vs on-prem discussion.

Simply put, this is going to be much more expensive for on-prem environments (and this includes customer-managed cloud environments – when saying “Cloud ERP” we are referring to the OEM SaaS platform and subscription).

It requires the server infrastructure for the software, which can include a server for the ERP software itself, a database, often a server dedicated to the user interface, and, depending on complexity and the software, other servers (API gateways, document management, etc…).

Beyond that, there are disaster recovery scenarios to consider. As well as networking, security, and all the other standard infrastructure concerns.

When companies are considering on-prem, they often have this infrastructure already in place – for an ERP they’re moving away from, for other applications, or, most often, both. The questions then become what are the advantages in moving to the cloud (don’t worry, we’ll discuss that later), is there an ROI, can costs for the current infrastructure be reduced, …?

While there are lots of questions around infrastructure in an on-prem scenario, these questions also can’t be ignored in a cloud/SaaS scenario.

These are the normal infrastructure requirements for a business – networking, security, PCs, shop floor scanning/automation (if used).

Beyond that, in a cloud model, there are requirements for infrastructure to connect the cloud environment to the on-prem environment for local access – things like printers, file servers, local databases, hand scanners, and the like. Servers need to be built and maintained for that.

Implementation/Consulting

This is near and dear to my heart. Ok, and maybe my pocketbook too.

From an up-front cost perspective, this might be your largest cost – and is usually the other primary thing people think of when they think “what does an ERP implementation cost?”.

This is also why a cheap ERP implementation may be the most expensive one.

Outside of padding my pocketbook, here are some of the reasons for that cost:

Project management

An ERP implementation without strong project management is like an orchestra without a conductor. The individual musicians know their parts, but without the conductor, instead of Mozart you get noise.

“An ERP implementation without strong project management is like an orchestra without a conductor.”

Process discovery and reengineering

A big driver of many ERP projects is modernization – OS, database, security, modern interfaces.

But – a REAL benefit that can be gained is to look more closely at your business processes – do they make sense for what you actually do now? Are they effective? Do they matter to the people doing them? To prepare for the future, these are things that should be looked at as part of an implementation – but, in reality, examining business processes is very rarely done to any real extent as part of an implementation.

Data migration

While it’s hard to say there’s a most important part of an ERP implementation, data migration makes a strong case for it.

Data is the life blood of your ERP system. We’ve all heard GIGO – garbage in, garbage out. Nowhere is this exemplified like in an ERP system.

Things that go into a data migration:

• Understanding the data structure in all systems
• Mapping between the different systems to the target system
• Transforming and normalizing data
• CLEANING DATA – this is often assumed to be the consultant’s job – A CONSULTANT CAN’T DO THIS for a company (well, not to the extent it should be done) because they don’t have the history with the company that someone internal to the company does.

“CLEANING DATA... A CONSULTANT CAN’T DO THIS effectively for a company - at least without the people that actually know the data.”

Customizations

To customize or not to customize… that really is the question. Customizations/extensions are a fact of life for ERP systems (we’ll talk later in the series about how you should think about them) – and it often falls to the consulting team to create them.

Reporting

ERP systems are not known for the quality of their out-of-the-box (OOTB) reporting or document output. Things like invoices, packing slips, purchase orders, checks, etc…, usually need to be, um, tweaked, shall we say.

And useful analytic reporting is not typically ready for prime time – although OEMs have been making strides in having OOTB analytics more ready.

Training

Your team is going to want to know how to use their system.

Many system integrators approach training with a “train the trainer” mindset – consultants train members of the core team as part of the overall implementation (discovery, prototyping, testing cycles) so that the core team is ready to train the rest of the company (which is a philosophy I agree with).

But time and core team availability sometimes becomes a factor, and the training either falls by the wayside or needs to be taken on by the consulting team.

Organizational Change Management

ERP implementations typically affect every part of an organization – and the organization needs to be brought along in a graceful and empathetic way.

This is often integrated with the project management functions – but organizational change management is a critical part of projects of the scale of an ERP implementation.

The old school, top down, shove it down their throat method can work, and there are valid reasons for this approach, but I’ve found it’s much more effective to foster people’s engagement and generate enthusiasm for the “why” of it – which can be guided by the consulting team but is really a shared effort, with the actual responsibility being on the company that will have to live with this day-to-day (the consultants are leaving someday. Really, we do. Eventually. Really.).

Internal People

An ERP implementation doesn’t happen in a vacuum – you need people working on it. And, ironically, it is often people critical to daily operations that should be involved. This is a factor that needs to be thought through as you put a project together – who SHOULD be involved, what kind of time commitment can they make, do you look at backfilling or shuffling duties, hiring temps… or whatever other creative resourcing makes sense for you organization.

Ongoing Support

Thankfully, once you go live, everything runs on autopilot, always and forever.

Maybe not.

You should be considering how the daily/monthly/annual needs of system maintenance and support will be handled. This can be internal staff, OEM support, or support agreements with your implementer or other partners.

Ignoring this cost doesn’t make it go away – it will just show up later – and likely higher.

“Ignoring this cost doesn’t make it go away – it will just show up later – and likely higher.”

I did open with “it depends”. The costs involved in implementing and maintaining an ERP ecosystem ARE complex – and hopefully you now see why that is.

If you plan for the costs upfront, at least you’re prepared. If not, you might get a call at 4:30 PM on New Year’s Eve.

Please join us for Part Three where we’ll talk about the million-dollar question – cloud vs on premise.

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