Investing in an ERP software system is an important event in your company’s history. Your company is growing and you have decided to eliminate the redundancies of outdated manual processes, to take advantage of the operational efficiencies inherent in ERP software. As you begin your software search, before evaluating different vendors, it is always good practice to establish a ‘ball park’ estimate to ensure that your expectations are aligned appropriately with the vendors that you are meeting with. To determine a rough estimate, you need to establish your software cost to services cost ratio. Have no fear, it is much simpler than it sounds, as many experts agree most firms will adhere to a 1:1 ratio. That is, a company should budget double the price of the software to account for the services needed to install and maintain an ERP system.
The first step involved in calculating a ‘ball park’ estimate is to estimate a software list price for the number of users that you need, then double that number in order to account for the software to services ratio. If the number you arrive at is one that you are uncomfortable with, it may be time to adjust your company’s expectations of an ERP system, or perhaps reconsider if you’re even ready for the investment. However, if this number is something that is reasonable and within consideration, you have passed the first barrier and are ready to answer 6 additional questions to gain a more accurate figure:
1. How many users will you require?
If the number of users is relatively small (less than 5) you will often pay more for services. This is because many ERP platforms require a minimum number of users, which is often five or more. Certain vendors may also sell user licenses in packs as opposed to single user licenses.
2. Do you prefer a cloud-based (hosted) or on-premises solution?
The different deployment methods for implementing software will have a significant impact on the overall costs. On-premises solutions tend to require a larger initial investment and up-to-date hardware and server infrastructure which can increase the costs. On the other hand, cloud-based solutions may require a smaller initial investment, but then charge on-going monthly fees for continued use of the system. Understanding the advantages and disadvantages to each deployment method to determine the best one for your company is an important decision and depends significantly on your current business processes and company infrastructure.
3. How much customization/reconfiguration of the software will you need?
Essentially, the more flexible your company is towards the new system, the lower the implementation costs will be. Customizing/reconfiguring certain features may require significant time for the vendor, consequently increasing costs. You may be able to gain efficiencies right from the start without any customization and can usually customize down the road. This makes it important to try and find a system that offers the most benefits and features specific to your company out-of-the-box.
4. Can you supply all the reports and documents you need the system to produce?
If you need certain reports that are not included in the system and require a certain degree of customization to ensure these reports are made accessible to you, it may result in a higher cost. It is good practice to try and use as many ‘out-of-the-box’ reporting features as possible to reduce this potential cost or work with a vendor who can train your team on producing their own custom reports.
5. How much data migration will you need?
Data migration is a hefty portion of the ERP implementation process. Therefore, if you are looking for a complete migration of data to the new system it may result in higher costs. If possible, it is wise to only bring data that you need to use on a frequent and consistent basis to the new system. Another option is continuing to use your old system database for the first couple of months to retrieve historical records for one-off situations.
6. How much training will your staff require?
How willing and capable is your staff in terms of learning and adapting to a new system? Training costs can escalate significantly if the users being trained have little or no experience using an ERP system, or if they are unwilling to learn.
Calculating the true cost of implementing an ERP system is by no means an exact science. However, the use of the software to services ratio and asking yourself the 6 questions above will provide you with a better approximation of the actual cost of ERP implementation. Having a general idea of ERP costs and your expectations will only be beneficial when you finally sit down with different vendor’s to discuss a new system. For a real-world example of ERP software costs, download our ERP Pricing Guide.