Something that is borne out in every survey of those who have implemented an ERP system, or those who are contemplating doing it, is that the three most important concerns are functionality, ease-of-use and total cost of ownership.

Managing the Total Costs- What You Need to Know Something that is borne out in every survey of those who have implemented an ERP system, or those who are contemplating doing it, is that the three most important concerns are functionality, ease-of-use and total cost of ownership.

Functionality and ease-of-use are both purely technological issues that rely on a proper understanding of your requirements and how well the system or systems under consideration comply with and, hopefully, anticipate those needs. Total cost of ownership, on the other hand, extends well beyond the IT/user arena, into wider operations, finance, management, and even into sales and marketing as it can impact on profitability as well as efficiency. There are cases where a disastrous IT implementation has taken down the whole organization, or at the very least severely damaged it, so you had better get your numbers right from the outset.

The emphasis should always be on the "total" cost, and this figure can be sliced and diced a number of different ways. Firstly, the upfront or project costs are those costs related to the initial purchase & implementation. They include:

• Software licensing & hardware costs, although these can be deferred though leasing or hosting options.
• Implementation costs contained in the supplier's proposal;
• Costs associated with any interfaces or system modifications;
• Costs associated with data conversion from the legacy system Secondly, ongoing costs you will face during the system's lifecycle (and don't forget that this could extend up to a decade). These are:
• Leasing or hosting costs depending on the method of initial purchase.
• All costs associated with system communications;
• Costs associated with employing additional or specialized staff; and
• Annual costs for system upgrades and helpline support. These costs are influenced by a number of factors, including:
• Number of users; and
• Amount of functionality implemented (i.e. number of modules). Finally and most importantly, there are business benefits achieved, which should be incorporated into the cost equation as a positive, as they are influenced by functionality (and whether and how well you use it), ease-of-use and efficient and effective upgrades and customisation. These potentially include:
• Improved delivery performance percent on-time and complete shipments; • Improved back-office efficiency due to order processing automation
• Reduced order lead time
• Reduced levels of inventory;
• Fewer number of days needed to close a month;
• Reduction in administrative costs.

Immediate cost issues.
The five immediate cost issues mentioned above can be dealt with through a variation of mechanisms. Software and implementation costs You should firstly avoid any ambiguity when communicating the specific requirements of your business. You should ensure that potential vendors are given every opportunity to understand your business processes and needs as well as you do. It also means avoiding big unknowns such as conversion, customization and integration - activities for which vendors can legitimately say they are unable to give you a fixed cost.

Interface customizations and system modifications Wherever possible, you should try to avoid any modifications or customizations. Modifications in particular should be avoided at all costs unless they are absolutely 'show stoppers' or business critical. This is particularly because modifications often prevent upgrades from being applied and you will be stuck with outdated versions of the software. System communications One area often neglected by many organizations is the significant disparities between different vendors when it comes to the efficiency with which their systems manage data behind the scene, i.e. the speed with which information is processed and transmitted around the organization. As surprising as it might sound, there can be a cost difference of 5-7 times between vendors for exactly the same transaction.

Multiply that over the system's lifetime and then by the number of users in an organization and the figures mount up. Additional of specialized staff Implementing a new system can mean new recruits in your IT department, such as database administrators or systems analysts or additional training of existing personnel. This has obvious salary and employment costs, particularly as, in a competitive global environment, specialists are in high demand and regularly headhunted and enticed away with better salary packages and career prospects. A key criterion in deciding which software vendor you choose should include whether you can implement your ERP system without having to increase the number of technical staff.

The implementation of new technology should be seen as an opportunity to reduce the IT burden instead. System upgrades and helpdesk support This is probably the easiest cost to determine, because it is normally presented as an annual percentage of the vendor's software pricing list. One thing to keep in mind is that you are normally much better off if your support comes directly from the software vendor - agents do not qualify as part of the vendor's organisation. There are too many cases where support has been outsourced offshore, with the service quality suffering accordingly.

Users and modules It is a corollary of software implementation that, the larger the organization the more users you have, and that means the total cost of software and services will rise as well. However, it is not always a linear increase. Ongoing business benefits While later articles in this series cover in greater detail the potential business benefits you can achieve on an ongoing basis through an ERP system, in summary it is fair to say that, when implementing a new ERP system, you have a great opportunity to improve business processes. So it is important to not just simply re-implement existing processes. Not only may you may be able to save costs during implementation, but also achieve significant benefits from an improved business process on an on-going basis.

Whether you are an IT or operations manager, or a C-level executive, it is vital that you consider all elements that comprise an ERP system's TCO. In addition to evaluating whether the ERP system fits your business requirements, you need to consider what the ongoing costs will be in the long run. If not careful, these may add up to significantly more than the initial capital outlay for the software and user licenses. In simple terms, you need to table a comparison of all of these cost elements for your preferred supplier and their competitors. What you will glean from this exercise is a clear insight into the true life-cycle costs associated with running an ERP system and a much better perspective on your ROI.

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