Addressing the issue of Total Cost of Ownership of an ERP project means spelling out some of the “hidden costs” that are sometimes overlooked or minimized when a vendor is trying to sell you their ERP or satellite software solution. Don’t be fooled. Those hidden costs can add up and need to be taken into consideration.
The leading expenditures on ERP projects are (listed in order of magnitude):
- Internal resources
- External (consulting) services
- Software (licenses and maintenance)
Some of the factors that affect these expenses are the size of the company, number of ERP users, and the depth and breadth of functionality. The true total cost of the ERP system’s deployment, however, is usually unclear during the evaluation process, because these expenditures are not readily apparent until they come up over the lifecycle of the project. Some (but not all) of these “unexpected” or “hidden” costs can include:
- Data conversion and improvement (both from existing systems and ongoing)
- Add-ons (external components), private customizations, satellite utilities (web sites, BI, BPM, Document Management, mail, etc.), their interfaces to the main ERP application and their migration through ERP upgrades (service packs and advanced versions).
- Identity management and security enforcement
All of these hidden costs take close scrutiny and time to discover.
IT Related Expenses
One of the bigger hidden costs, or one not always adequately factored into the equation, is the expense item of IT (or the IT staff/internal resources).
Data collected for 2004-2007 on companies with 500-999 employees in the U.K by Kew Associates clearly shows that annual spending on IT staff is larger by a factor of 4 than any other IT expense item.
What are the IT people doing?
IT people make a host of applications tick, including the selected ERP system and all other applications. An ERP system that can incorporate as many applications as possible will minimize the costs involved in maintaining a large IT staff and the hours spent on dealing with multiple applications, not to mention the costs of the applications themselves.
To be sure, there are plenty of good-quality, low-priced, very specific software tools out there in the market. But when you combine the price of the software with the expense of their integration with an ERP application and the IT overhead required to support and maintain them all – the costs just keep adding up.
Installation of traditional ERP products can take months. There are a few products out there that can shorten that time frame substantially. Ask when vetting products, in order to get a clearer picture of what the cost and time frame for this will be.
Implementation & Adoption
A speedy implementation cycle lowers the TCO, but the truth is that there is no easy road for implementation. It doesn’t matter if your solution is SaaS, on-demand or on-premise since the time and cost of implementation depends on the depth and functionality of the chosen system, and the effectiveness of its adoption by the workforce.
Finding a solution that can either smooth the road to a successful implementation, or provide you with tools to do it yourself as much as possible, is the best solution. This can often also provide a hidden benefit, if you will, of giving end users a sense of “ownership” of their processes, which can smooth the path to adoption. Some things you can look for in a software package are:
- User-level configuration utilities for data migration, eliminating the burden of writing customized conversion routines.
- Training tools incorporated in the application, including ready made templates, and step-by-step interactive help files and/or wizards which will ultimately empower end users.
- Good, easy-to-understand documentation and help tools.
Software Costs/Platform Options
Special pricing plans for various software solutions offer a wide array of convenient flexible options, from fully hosted SaaS ERP to per-user/per-month to flat fee on-site installation:
- Choosing the fully hosted on-demand/SaaS ERP plan not only sets a low-cost fee per user per month, but can help you save on the cost of servers, operating systems, middleware, databases and accompanying administration (maintenance and security). You can also “try before you buy,” and stop using it if the software does not match your requirements.
- With the “Per-User/Per-Month” on-site installation you can start out small, using a few of the modules, and expand to use additional modules as you need them. Let the use of the software grow with the features you gradually employ and the number of users within the organization that progressively move over to the new system.
- For companies that have existing infrastructure, or that need to keep the application “in-house”, on-site installation are often the only solution.
Look for software that includes user-level design and configuration tools for as many aspects of the software as possible (which can also be limited if required), especially to control layout and reporting functionality (e.g. look for software that can help you build the reports you need). This will keep private customizations to a minimum.
These are some of the major factors that are part of the equation and affect the TCO of any ERP solution. The challenge is to choose an ERP solution that not only fits your business requirements, but can help you address and minimize even these “hidden costs.”
By Rebecca Haviv