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Posts Tagged ‘ERP costs’

implementation-costs-1024x483As providers of ERP software, we have long observed the tendency among some to severely underestimate the actual cost of a system implementation.  When we hear these claims, we typically presume that the sellers are of the “in for a dime, in for a dollar” school of thought, which says that once we get the client a ways down the road, then we can talk about some of the details that may have been skipped over in the selling stage.  Of course by that time it’s too late.  Most companies are reluctant to bail on these ‘sunk costs,’ even if their implementation does threaten to go 100%, or 200% or more over what they first believed it would take to implement.

So we were interested to see what the folks at Panorama Consulting learned after completing their 2016 ERP Survey.  Their own data confirms our own long held suspicions about the unrealistic expectations that are too often set (as in “sold”) around ERP.  Here’s what they had to say, after studying hundreds of ERP implementations and their results.

For starters… only about 40% of ERP project surveyed came in on the scheduled time duration.  No surprise there.  In fact, about one-third of projects came in at least 25% beyond the estimated time duration.

From a cost standpoint, the figures were similar, where about 20% of projects were anywhere from 25% to at least 75% over budget.  It appears that most projects, about 60% of the total, were within about 25% of their budgeted estimate.

But their key takeaways can be summed up in their own words:

ERP vendors and consultants are notorious for underestimating the time and cost required to implement systems. This is sometimes due to the fact that overzealous sales reps are trying to lowball their estimates to get the deal done, while other times its simply due to the fact that sales teams do not truly know the costs required to make an implementation of their software successful.

Unlike the 1:1 software to implementation cost ratio that the industry typically uses to estimate implementation costs, our research over the last decade shows a remarkably steady, yet different metric when it comes to cost. The average organization spends a total of 5-percent of their average revenue on the total cost of implementation.  This metric includes everything from software licenses, hardware upgrades, consulting fees, internal resource costs, customization, contingency costs and everything in between.

For example, a company that does $100M in annual revenue is likely to spend an average of $5M on their total cost of implementation. Vendors don’t like these numbers because they can create sticker shock while they are trying to close new business, but the facts can’t be disputed.

Keep in mind that most ERP vendors don’t have insights into these additional non-vendor costs, but they typically constitute a majority of implementation costs. Also keep in mind that larger organizations typically see percentages lower than 5%, while smaller organizations can see numbers a bit higher. This is largely because larger organizations have size and scale that enables a lower normalized implementation cost relative to their smaller counterparts.

Put another way, they say: “Expect to spend a total of 5x your direct cost of software.”

Multiply your software license costs by five to get your total cost of ownership. Again, as is the case with the 5-percent metric discussed above, this will lead you to a total, “all in” cost of ownership that includes everything that might be required to make your project

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proformativeA group (and website) called Proformative provides a web forum (www.proformative.com) for “corporate financial professionals” (Controller, CFOs, etc.) that provides useful information to its audience about a wide range of finance-related topics from HR and Recruiting to ERP and Excel Shortcuts, and much in between.  Proformative boasts of having over 100,000 registered members.

Recently, under the title “ERP Implementation Methodology Best Practices & ROI” (found here) several contributors voiced their opinions about what to expect from ERP.  You can peruse the article yourself, but we thought we’d highlight a couple comments that caught our eye.

Bob Scarborough, CEO of Tensoft, Inc. listed 5 important things he thinks you should consider:

  • IT Costs – It’s more than just the software, but still the easiest to count.
  • Productivity Impact – Rectifying data input errors & redundancy are valid ROI components.
  • Visibility Impact – When new systems provide more/better data access or velocity, it matters.
  • Audit & Compliance Impact – Better controls & repeatable processes reduce audit costs.
  • Risk Impact – How much risk is built into your current system? This cost is real, if tough to count.

Len Green, a Consultant at BT Partners suggests looking out 3 to 5 years for costs from day one.  He notes that some improvements occur only after implementation, so allow for progressive improvements, not 100% gain in year one.  He adds that software costs are only part of the story: additional staff during implementation and integration with other current business systems may affect overall costs.  And don’t count headcount reductions that do not equal a whole FTE.

Emerson Galfo, CFO at C-Suite Services questions whether ROI is really the best metric.  He cites Amazon as having invested heavily in technology since its inception for reasons including pursuit of market share or to support a business vertical.  If they’d evaluated Amazon Fire solely in terms of ROI, it might never have happened.  Yet it has contributed, he notes, “to a thriving Amazon ecosystem.”

And finally, this from Wayne Spivak, CFO at SBAConsulting.com adds: “Implementing a new ERP system that is well thought out in advance, with clear understanding of the pitfalls, the problems, the issues and the costs of both dollars and time will yield better (I’ll never say perfect or even great) results out of the box.  We need to see larger pictures than dollar and cents on every investment…”

 

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justifypic3In our previous two posts here and here we looked at some of the very real “hard” costs, or tangible benefits, that are typically derived from a successful ERP implementation.  We even put a few numbers to them.  In today’s concluding post, we’ll look at a few intangible benefits.  These may not result in hard dollar savings, but they are beneficial and often important nonetheless.

As noted earlier, the basis for many of our comments are from a report prepared by Compare Business Products.com.  Based on their research, previous industry research results, and our own experiences over more than twenty years, we feel confident that anyone who applies ERP correctly will receive benefits in line with those cited in our previous posts, and with our comments today.

Improvement in Process Design and Production  Since ERP provides a single, company-wide, unified silo of information about products, orders, customers, etc., it stands to reason that a company will have better control over process design and production.  Changes to products/orders can be managed in real time.  Everyone can be in the same information loop.  Production agility is improved, along with response times and overall visibility.  Additionally, ERP can often support ‘rules’ of configuration, thus improving the speed and flexibility of order building, BOM changes, and product customizations unique to customers.  Your entire team – and possibly even your customers with some additional work – can see for themselves what changes are or are not possible, and often, track their order status as well.  The end result is tighter supply chain integration between factory, customer and supplier.  But perhaps the real end result is improved customer loyalty and retention, and typically, sales too.

Improvement in Accounting Procedures  Here again, the common silo of information means less duplication, in this case, of accounting files and data.  A lot of paper can be eliminated with ERP through electronic document archival.  Accuracy is improved when there is only one set of data to work from.  Order and product costing can be faster and more flexible.  Work in process (WIP) can now be tracked, financial statements are automated and simplified, with greater accuracy, and most reporting can now be done more quickly.  Overall accuracy and timeliness of reporting is improved.  Best of all, a lot of redundant data entry is eliminated, thus saving wasted and unproductive labor.

Improved IT (or “MIS”) Functionality  With information in one place, under one software system, management information systems are improved when it’s no longer required to collate information from different sources.  With today’s newer systems, dashboards can be built to monitor key performance benchmarks, and users can usually drill-down to the source data they need on an ad hoc query basis.

In conclusion… add up all the costs we’ve noted, hard as well as your own estimate of the value of soft cost savings.  Even a fairly small manufacturing concern is going to see very real, six-figure annual cost savings once deployed.  And that’s a reduction in costs that goes on year after year.  And the more you grow, the greater the ratio of savings created by your ERP investment.  No matter how you slice it, when you do the math, the old adage is true of ERP: It doesn’t cost, it pays.

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justifypic2In our previous post we discussed two very real, very important cost benefits that accrue to companies who successfully deploy ERP systems.  The improvements to inventory and receivables are significant, and well documented.  As we noted, the typical $10 million factory can free upwards of a million dollars in newly available cash through inventory and receivables collection improvements.  Those are very real savings.

Those two areas alone are often capable of offsetting the entire cost of your ERP system – and then some.  Next we’ll look at still more areas where benefits accrue to the wise…

Reduction in Material Costs  ERP almost always leads to improved procurement practices.  As your forecasting improves, your order lead times shrink, and you run into fewer stock-outs as well.  Better advance planning of purchasing in turn leads to obtaining better discount breaks, terms and conditions from vendors.  When you improve your forecasting, they can improve theirs, and often you’re rewarded.  Typical figures cited in reductions to material costs for these reasons range around 5%.

Lower Labor Costs  Usually, ERP helps improve manufacturing practices (and helps you grow leaner), and as such you can reduce outages, interruptions, and with them, re-work, overtime and mistakes.  Better demand forecasting can level out production schedules, reduce the stresses of rush jobs and expediting, and optimize tooling and machine setups as you learn to stage your production runs better through improved MRP, scheduling, planning and forecasting.  Estimates are that ERP can reduce overtime and re-work by roughly 10%, while speeding up factory floor flow.

Improved Sales and Customer Service  One key benefit of ERP is improved levels of intra-company communications – a shared silo of information accessible to all users.  This improved coordination leads to shorter production leads and eventually to improved sales as you prove your ability to deliver.  The result is improved customer loyalty which always has a positive effect on sales.  Another benefits lies in ERP’s ability to improve production agility.  With proper planning and MRP, you can better accommodate order changes later in the process, and further improve customer loyalty and satisfaction.  The long-term effect is improved customer retention (and less customer loss), leading to notable increases over sales volumes pre-ERP.  A figure of 10% is often cited as typical here.

In this and our prior post we’ve tried to illustrate some of the proven benefits to ERP we’ve seen over the years, and as noted in a report by Compare Business Products.com.  These are the benefits that yield what we like to call “hard” dollar savings – quantifiable cost reductions (or revenue increases) proven to result from successful ERP deployments.  Collectively, they will return more than your original ERP investment — sometimes surprisingly quickly.

In our next and final post in this series, we’ll take a look at some of the intangible (or “soft”) – yet still very important – cost savings attributable to your ERP investment.  Stay tuned…

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justifypic1A recent article from an outfit that provides a variety of product info and comparisons to businesses, called Compare Business Products in Palo Alto, made some good points recently that reinforce what we’ve long known are the tangible, as well as sometimes intangible, cost savings and benefits that accrue to companies that effectively deploy ERP systems.  Their points are worth noting and highlighting in our post today.

The cost savings that accrue from a good business management system do more than just make you a better, more efficient company.  They actually pay for themselves.  And then some.  Let’s look at a few of the areas where research studies have proven this to be true.

Inventory Reduction  In a typical successful ERP implementation, the study’s authors state, “a 20% inventory reduction becomes a commonly achieved benchmark.”  That’s not just a one-time savings, but a recurring event that is further augmented through lower warehousing costs, less handling and transport, reduced obsolescence, and so on.  Together, the collective savings of improved turns and lowered costs can typically take upwards of 30% out of the costs for inventory related items in the manufacturing or distribution environment.

On the less tangible cost-savings side, let’s not forget the benefits that normally come in the form of stocking the right items, avoiding out-of-stock situations and their negative customer effects, avoiding the buildup of obsolete items, and having fewer part shortages to deal with – all the result of improved planning, MRP and visibility.

Finally, an implementation of something closer to just-in-time stocking will put any firm on track for a leaner experience, and free up funds for more important business needs.

Let’s combine inventory reduction savings with a related improvement typically caused by ERP]…

Improved Receivables (days of receivables ratio)  Research indicates that the number of days between invoice and collection, on average, goes from about 73 days to 60 once ERP has been established.  That’s a fairly significant cash bump, the result usually of improved billing procedures, visibility, aging control and accounting follow-up.

Combining inventory reduction and improved receivables in a $10 million (revenues) factory can lead to some serious cash improvement.  A typical company in this range might have around $3 million in inventory, perhaps $2 million in receivables, and $500,000 in cash available.  A reduction in inventory of even just 25% frees up around $750,000 in newly available cash flow, while an improvement of 13 days in A/R receipts per our average cited above, yields an 18% improvement (reduction in A/R), thus freeing up another $360,000.  Combined, the typical improvement produced by a well-deployed ERP system in a $10 million firm is over one million dollars.

And that’s just the beginning.  In our next post, we’ll look at a few other areas where ERP frees up cash, and creates other savings and benefits, resulting typically not just in a system that pays for itself, but one that can return those costs several times over.  Stay tuned…

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ERP is expensive, and the cost can vary greatly depending on the organization.

Obvious factors range from company size to number of users, from depth of desired functionality to what services a particular organization requires and, frankly, how savvy their users are.

According to an Aberdeen survey called “The Total Cost of Ownership of ERP in Mid-Size Companies” over half of the nearly 650 companies surveyed cited TCO as – not surprisingly – their number one concern.

TCO covers a broad range of expenses well beyond just the ERP software.  For example it includes hardware, services to implement, license costs and maintenance on all software modules.   Some companies may rightly choose to include certain staff costs in their TCO assessments as well.

The survey found that the cost for a $50 to $100 million company that included an average of 92 users totaled just over one million dollars of total investment.  In a company of $100 to $250 million revenues and just under 200 users, the figured rose to $1.7 million.  Of course, for larger companies, TCO rose accordingly.

In the Aberdeen survey, only Microsoft was willing to share cost information, and those included $2,250 per user for the Business Essentials version of its software, and $3,980 for its Advanced Management suite. 

[PSSI can confirm those remain the exact prices still being charged today for the Dynamics NAV solution.  Moreover, our analysis has been that the Advanced Management functionality is typically what’s required in the manufacturing and distribution environments.]

Our own experience teaches us that the $4K per user for license costs, plus an allowance of 16% for annual maintenance provides an appropriate cost estimate.  Greater functionality beyond the core software often requires additional investment in added functionality, or sometimes, third-party add-on applications. 

To the pure software license costs (est. $4K per user) we then advise clients to add one to one and a half times those software costs, on average, for deployment.  The cost varies depending on the number of users to be trained, as well as depth of training, experience of the users, and modifications required to processes or software.  Generally, the more users the lower the ratio of service costs to software license costs, as the costs of training and deployment are spread over more users.

Our deployments actually tend to cost considerably less than the Aberdeen assessments above, but they also don’t necessarily include their 92 user average either.  We’ve found for the small to midsize firm, say 25 users, that a budget of around $200,000 to $300,000 will get you the user licenses, annual maintenance and necessary training on a basic, full system.  Hardware will add to that, but if your hardware is fairly current, those expenses can be minimized.  Modifications would be quoted separately, where your needs diverge from base software functionality.  Associated costs for appropriate SQL licenses and servers can add to your costs, as can additional (third-party) functionality. 

Still, even at half a million dollars at the very high end, a company in the $20M to $50M revenues range, with say 25 to 50 users can be up and running in a few months, and expect to recoup those costs surprisingly quickly — IF they’ve put sufficient thought and effort into the planning stage upfront in conjunction with their ERP consultant 0r reseller.

So there you have it: our five-part latest wrap-up on the mechanics, benefits and costs of ERP.  Over twenty years, we’ve learned that the costs to clients in money, time and, yes, some short-term anguish, are mollified greatly over the ensuing years by the benefits of reduced business costs, greatly increased capacity with similar staff size, and the ability to compete effectively while you grow in your chosen marketplace.  As always, to those who persevere, i.e., the winners… go the spoils.

To aid you in system selection, we’ll present a “Mid-Market ERP Solutions Checklist” from InsideERP’s Buyer’s Guide, in our next post.

Meanwhile, the complete edition of the Inside ERP Market Buyer’s Guide is available here.

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Panorama Consulting Group has released its 2010 ERP Report, a survey of 1,600 organizations that have implemented an ERP system in the past four years.  It was quoted in this article at CIO.com.  The results seemed to us a logical benchmark for the state of ERP, i.e., what it costs, and how long it takes to get deployed.  We’ll recap some highlights below.  (In part 2 we’ll look at Software as a Service (or “SaaS”) survey results.)

From the data, it’s clear that many of those respondents were large companies.  Readers of our blog know we’re focused on the SMB (Small to Midsize Business) market base, so some of the raw dollars represented here would have to be ratcheted down by perhaps a factor of ten.  But the percents revealed and the lessons being learned apply to any business looking to implement ERP.

The report yielded three key “reference points” when compared to Panorama’s study two years prior (just before the recession really took hold):

1. Total Cost of Ownership.  According to the 2010 survey, the average investment ran $6.2 million, down from about $8.5 million in 2008.  (Like we said, chop off one decimal place, probably, when you’re looking at the small business market.)  Interestingly, while companies are spending 25% less than in years past, they also report that they are less satisfied with their investments.  The correlation is interesting, if not definitive.  They could be cutting corners or minimizing training, which we’ve found always leads to a less than successful implementation.  Or, there could be other factors at play here.

Companies are spending just under 7% of revenues on ERP, down from an earlier figure of 9%.  We find these figures skew somewhat lower in the SMB market place — though they probably shouldn’t, if clients truly want to secure the greatest bang for the buck.  The reason is that ERP — properly implemented — can be a huge cost-reducer and often a signficant competitive differentiator — thus increasing gross margins when properly deployed — as well.

2. Implementation Times.  Average implementation times were 18.4 months, down from 19.8 two years prior.  A weak economy may have driven companies to tighten up on their implementations, and/or to decrease the scope of their initiatives.

3. Implementation Costs.  54% of deployments went “over budget.”  That’s slightly better than the 59% of two years prior.  According to Panorama Consulting, “The finding is attributed to the fact that many organizations in our study failed to identify and budget implementation costs not attributable to software vendors, such as project management, organizational change management, hardware upgrades and the like.”

Specializing in the smaller SMB market, our experiences tend to skew a bit differently.  Generally, costs in that sector typically are under half a million, depending on all the “extras” clients request, and the length of the project.  Implementations tend to run 6 to 9 months on average, somewhat less for in-family upgrades.  The good news for customers however is that a lot of work can be done on “our side” with a less than full-time commitment on our clients’ part, as the preparatory work is done.  That all changes of course when it’s time to “go live.”

In our next post, we’ll look briefly at what the report’s findings revealed when comparing the traditional on-site ERP solution with a SaaS solution.

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