As 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