Enterprise Resource Planning

In Part 4 we went through the most critical functionality of an ERP, Enterprise Resource Planning, software system is its reporting capabilities. In Part 5 we will look at a major influencer in selecting a new ERP vendor and ERP software system, cost. However, in this article we will go one step further and address the total cost of an ERP system or total cost of ownership (TCO). An ERP software system has many component of cost. Unfortunately, in many cases manager who are evaluating enterprise systems and ERP vendors primarily look at the cost of the ERP software app and are in for a rude awakening during the implementation process and over the following years. Total cost of ownership is just as it is described. It’s the total cost burden to your organization considering all facets of costs and resources required to implement your new ERP system and keep it in current working condition on an ongoing basis. For many companies this is a hard final number to calculate as in an ERP system there are only a handful of readily identifiable hard costs such as software license fees, and maintenance fees. Other hard costs include implementation costs which are usually estimated by a multiple of the software license costs ranging from an additional cost multiple of 100% to 300%. Maintenance is another estimated costs with a range of 15 to 25% of the cost of the software on a recurring annual basis. Support and hardware costs including upgrades can also be estimated based on standard support fees and upgrade recommendations. The more difficult costs to tabulate in your ERP software initiative are the soft costs which are much more subjective. In order to get a better handle on the ERP system soft costs your company will need to determine how it will use the ERP system, who will use the system, and estimate the time that is required to perform particular functions. Some common soft cost areas to calculate with salary burden estimates are internal application support, upgrades, training, business processes efficiencies gained/lost, duplicate entry impact (positive and negative), application response time impact, and additional required reporting tools with accompanying support resources required. By compiling all of these costs, you may get a surprising outcome in your total cost analysis. If you were to consider only hard costs, it is clear that going with a new ERP vendor and software system would cost your company more money. However, when considering soft cost factors, in many cases companies find out that a new ERP software implementation is a financial benefit to the organization from productivity gains, alone. Other soft costs such as potential revenue gains and customer retention benefits may further increase your ROI on your IT investment.