Part 3 of a 4 part series

Enterprise resource planning software is a vital piece of successful business management. ERP is responsible for some truly amazing business outcomes due to its ability to de-silo information for improved supply chain management and demand forecasting. One famous example is Nestle, able to earn an additional $325 million the year after implementing and improving their ERP with regards to supply chain and forecasting, merging 29 different brands into one real-time database.

There’s no doubt the ROI can be impressive. But how much should your company expect to pay before it begins to see returns? That more than anything else is the number your finance team is likely to want to know first.

From a general standpoint, the estimated deployment cost for an ERP depends largely on the company size and market range. (Table 1)

Cost, however, is rarely cut and dry. Several factors play into the total cost of an ERP implementation at your specific company. These factors include:

• Size of company (number of users, departments, locations, etc.)
• Type of solution (industry-specific, customized, general, flexible)
• Required resources (user training, task tracking, external consulting)
• Level of customization

Clearly, the more complex your implementation needs, the more you’ll need to pay. Costs will also differ between on-premise hosted ERPs, and cloud-based subscription ERPs. On-premise may be pricier to install in the beginning, but cloud-based will include ongoing renewal fees that may end up costing you more in the long run. It’s all about the needs of your business and how the ERP you want can meet those needs. Or not.

Interestingly enough, the software isn’t the only thing you’ll need to budget for, and it may even end up being the lesser part of the overall price tag at about 15 to 30 percent. Cost breakdown also includes database and system management (5 – 10%), infrastructure (10 – 20%), and human resources (40 – 60%).

When will I get payback from ERP—and how much will it be?

While there’s no failsafe calculation to determine how long and what the ROI from your new ERP will be, industry experts estimate that the typical timeframe is three years or less. One consulting group pinpointed this more directly at 2.7 years. This may seem like a long time, especially considering how much you may be paying to implement the ROI in the first place. However, you’ll likely see improvements right away in level of productivity, auditing and compliance, and forecasting and management that will indicate the future level of ROI you can expect to see.

What are the hidden costs of ERP?

As mentioned above, the sticker price on the ERP software itself is rarely going to be the final price your company pays. More factors are involved in an implementation than simply purchasing the software. Here are some other areas to expect some cost accrual:

1. Training: Training is the near-unanimous choice of experienced ERP implementers as the most underestimated budget item. Training expenses are high because workers almost invariably have to learn a new set of business processes, not just a new software interface. However, this training will prove invaluable and should absolutely be a line item in your ERP budget. It will be the best ERP investment you ever make. 

2. Integration and Testing: Testing the links between ERP packages and other corporate software links that must be built on a case-by-case basis is another often-underestimated cost. A typical manufacturing company may have add-on applications from e-commerce and supply chain, to sales tax computation and bar coding. All require integration links to ERP. If you can buy pre-integrated add-ons from the ERP vendor, you’re better off. If you need to build the links yourself, expect things to take longer with a higher price tag.
   
3. Source Code Customization: Add-ons are only the beginning of the integration costs of ERP. Much costlier is actual customization of the source code in the core ERP software itself. The source code customizations can affect every module of the ERP system because they are all so tightly linked together. Some vendors provide customization services, or you may need to do it in-house. Either way, prepare for extra costs associated with customization.
   
4. Data Conversion: It costs money to move corporate information, such as customer and supplier records, and product design data from old systems to new ERP homes. Although few CIOs will admit it, most data in most legacy systems is of little use. Companies often deny their data is dirty until they must move it to the new client/server setups that popular ERP packages require. Consequently, those companies are more likely to underestimate the cost of the move. But even clean data may demand some overhaul to match process modifications necessitated—or inspired—by the ERP implementation.
   
5. Consultants: When users fail to plan for disengagement, consulting can continue well after the go live date. Often this is the result of failing to plan enough training for staff. In other cases, staff begins to depend too much on the outside instead of taking ownership of the new system. To avoid this, companies should plan on a clearly defined end-point for the engagement. Once that point is reached, all requests for help and assistance must be controlled though a single point of contact.
   
6. Implementation Team Phasing: Most companies intend to treat their ERP implementation as they would any other software project. Once the software is installed, they figure the team will be scuttled and everyone will go back to his or her job. But after ERP, you can’t go home again. The implementers are too valuable. Because they have worked intimately with ERP, they know more about the sales process than the salespeople and more about the manufacturing process than the manufacturing people. Companies can’t afford to send their project people back into the business because there’s so much to do after the ERP software is installed. Just writing reports to pull information out of the new ERP system will keep the project team busy for a year at least. And it is in analysis and insight that companies make their money back on an ERP implementation. Unfortunately, few IS departments plan for the frenzy of post-ERP installation activity, and fewer still build it into their budgets when they start their ERP projects. Planning to phase these teams out over 1-2 years is a good gauge for post-implementation.
   
7. Post-ERP Lull: ERP systems often create challenges with companies that install them. The most common reason for the performance problems is that everything looks and works differently from the way it did before. When people can’t do their jobs in the familiar way and haven’t yet mastered the new way, productivity will decline briefly. But, after a month or two or using the new system, companies ultimately find that they people and processes are much more efficient.

The more prepared you are for all aspects of your ERP installation and the costs involved, the better your company will be able to budget for these needs. Eliminate surprises by planning for each of these line items—even those you may not expect to need or use—to ensure your team has the most accurate impression of what this implementation may cost. This will help ensure that when the day comes, you can reap the most ROI rewards from your new ERP.

Need a little guidance figuring out which ERP best suits your company needs? Let PositiveVision help you craft the perfect ERP package, from software to training to on-going support, and get on your way to ERP ROI in no time.