Measuring ERP Costs Against a Piece of String

Have you ever thought about how much your ERP actually costs? Unfortunately, there’s no definitive answer – the answer’s the same as the length of the proverbial piece of string – it depends.

We digest the latest report to come out of independent consulting firm Lumenia, as it discusses the numerous variables impacting the true cost of ERP.

Project Cost vs TCO

The first thing to establish when considering ERP cost is whether you’re more interested in project cost or Total Cost of Ownership (TCO).

Project costs relate only to the cost elements incurred during the lifetime of the implementation project itself. TCO, on the other hand, includes costs that will be incurred in using the ERP system over a defined period, as well as the project implementation costs. Generally, the period used in TCO calculations is three to five years.

Project Costs

External costs

The main external cost elements during the lifetime of an ERP implementation project include:

• Infrastructure

• Software licences

• Implementation

• Maintenance

Internal costs

The largest contributor to internal ERP project costs is typically the labour cost of internal team members. In some organisations this cost is not considered, the argument being that the salaries of internal team members would be paid anyway, irrespective of the project. Conversely, other organisations factor in any and all time spent on the project by internal resources, whether or not they are a core member of the project team. For example, all users will require training, and the time they spend at this could be considered a project expense.

The most common approach is that the labour cost of the core project team members is included.

Ongoing Costs

Several recurring ERP costs become applicable following project completion. These, taken with the project implementation costs mentioned above, make up the full ERP TCO.

As before, we can distinguish between external and internal ongoing costs.

External costs

• Infrastructure

• Software Subscriptions (SaaS)

• Maintenance and support

• Upgrades

• Enhancements

Internal costs

The effort to support a new ERP solution requires the set-up of new processes and teams to provide the necessary level of service to the business. Go-live marks the transition from project-mode to those new ways of working. Usually, some members of the core project team return to the business, whereas others join new teams to provide ongoing solution support and deliver upgrades and enhancements.

IT Service Management and Master Data Management

Internal support teams can include roles such as a helpdesk manager and helpdesk agents, to own and manage ERP-related incidents, problems and service requests, as well as business analysts to act as the bridge between business and IT teams. Business analysts might identify and scope new projects, for example, understand and interpret business change, and deliver reports and Business Intelligence outputs. Master data management and governance resources are also required, to ensure the ongoing integrity and consistency of data within the ERP system and across the organisation.

Other Technical Resources

In addition to the support resources mentioned, there are also internal labour costs associated with the infrastructure required to run the ERP system, including network administration and technical support resources. While, typically, such resources are not fully dedicated to the ERP system, a proportion of their cost should be factored into TCO calculations.

Conclusion

The most accurate way to estimate ERP costs is to carry out a detailed project scoping exercise, which should be led by someone with knowledge of and experience in ERP strategy, selection and implementation. This takes time and may require external expertise, but it will ensure that your cost estimates and assumptions are complete and realistic.

For more information, download our free ERP buyers’ guide which will help you answer some of the key questions needed to find the right ERP solution for your business.

The full report from Lumenia is available for download at www.lumeniaconsulting.com/insights