Your ERP's total cost of ownership: From hidden to unforeseen, and everything in between
ERP systems have many advantages for your organisation, from streamlining production processes and efficiently managing your data with the needed transparency to adapting them to your specific requirements. However, these benefits come with a price.
When implementing an ERP system, you must justify your expenses and understand the cost of implementation and maintenance of your ERP system, before making such a significant decision. You should consider your ERP’s total cost of ownership, which considers the total lifecycle cost of your investment, from expected to unforeseen expenses.
What is your ERP’s Total Cost of Ownership (TCO)
To keep things simple, your TCO consists of all expenses, that will/can occur during your ERP system’s lifecycle. This means, considering foreseen and hidden costs in your calculation. The latter is a true bottleneck of TCO calculation. To get a clear view of all your costs we will break them down into five defined categories:
1. Software costs
These include the number of modules your ERP consists of and the number of users that will use the software. While calculating your TCO it’s important to elevate the number of users in your initial calculation. Often, more people get added to the system mid-implementation so taking this into account does not cause any sudden surprises. Another software fee that your third-party can ask for is annual maintenance on the license.
2. Customisation cost
One of the advantages of ERP is that the solution is customisable to meet your specific needs. However, this takes time and effort, meaning a certain cost. There are three types of customisations: Process & Features, Forms & Reports, and External Application or Service integrations. Having a clear understanding of which customisations you might need, will save you time as well as money during implementation.
3. Cost of labour
Before implementation you already have a good view on how many hours a total implementation might require, but a good view is not always a perfect one. So, take into consideration that more hours could be needed, for example during the data transferring process, which is a task and can lead to unexpected delays.
4. Integration cost
The testing and integration phase of your ERP solution can either go smoothly or through a time-consuming path. Mostly the second whereas the testing phase, both manually and automated, typically uses on average 50 % of the implementation budget. Examples: setting up, configuring, testing the software, getting it into production, setting up backups, disaster recovery, and data migration.
5. Training & support
To make sure your investment is worth the extra financial effort, your employees will have to undergo training, so they can efficiently operate and function using the new solution. Usually, companies hire dedicated consultants to help and train staff to get the most out of their ERP. Training expenditures are typically the most difficult to predict since organisations tend to overestimate their ability to adapt to new processes with minimal resistance to change.
Costs of On-premises vs Cloud-based ERP solutions
For on-premises systems TCO and ongoing maintenance fees are much higher. A company must physically buy and store the solution on large and expensive servers and backup servers including the needed licenses to run this solution. With such a technical capital you also need to train in-house IT-staff that can install, maintain, troubleshoot, develop, upgrade, and secure the solution. All of this, on top of their other daily priorities. What makes this even more expensive is the short lifespan of approximately seven years of an on-premises solution, leading to a ROI that’s not competitive with cloud-based solutions.
A cloud-based ERP solution runs in the cloud and is owned by a third-party offering a variety of IT services. This does not require a huge upfront investment of on-premises facilities and staff, making it the ideal solution for even the smallest organisations.
Briefly: the advantages of Cloud-based ERP
- low hardware and software costs
- little maintenance and upgrades
- accessible at any time and location
- enterprise-grade cybersecurity
Why knowing your TCO is important
When you know your Total Cost of Ownership of your ERP, you can analyse the scope of the intended implementation, calculate a rough implementation cost for planning and capital allocation purposes, measure the ROI of the ERP and better track licensing costs, professional services, internal support etc.
ERP systems provide several benefits, spanning from improving production processes to efficiently managing your data. However, this has a certain price. Having an elaborate calculation of your Total Cost of Ownership, including even worst-case scenario costs, may help you to decide which ERP solution works best for you according to your budget.
Want to know more?