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Posts Tagged ‘ERP costs’

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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