We regularly work with clients to help them estimate their ERP implementation budgets as part of the ERP selection and planning process. Given the hidden and unanticipated costs associated with a successful ERP implementation, this can be one of the trickiest parts of an enterprise solution initiative. In fact, and as we’ve seen in our analyses of ERP failures in our expert witness work, a company’s unrealistic expectations regarding the total cost of ownership of ERP software is often the first domino to fall in an ERP implementation failure. Without a realistic budget, companies end up cutting corners on activities that are critical success factors and paving the way towards a disastrous conclusion.
Panorama research indicates that the average company invests 4.1-percent of its annual revenue into its ERP implementation. However, most companies fail to budget anywhere near this amount. Part of this disconnect is driven by software vendors that outline a one-dimensional estimate of the implementation costs for their ERP solutions. These estimates often fail to include hidden expenses associated with ERP implementations, such as internal resources, external consultants, hardware upgrades, and a host of other items necessary for a successful project.
Further, a software vendor will usually estimate implementation costs to be a 1:1 ratio between software licenses and technical implementation costs — meaning $1 of technical implementation costs for every $1 spent on software — these estimates are woefully low for most companies. Based on our research and experience, a 1:4 ratio (e.g., every $1 a company spends on ERP software translates to $4 of total implementation costs) is much more reasonable.
Below are some of the cost components commonly overlooked by organizations in both the ERP implementation planning and implementation stages:
- Hardware and infrastructure upgrades. It is rare that an organization can implement a modern ERP system without a modern IT infrastructure to support it. Servers, databases, bandwidth, PCs and other components of an organization’s IT infrastructure often need to be upgraded to support the new system. In addition, IT staff often need to be augmented with additional resources, training, or outside consulting to support the new environment.
- Longer than planned implementation durations. Contrary to popular belief in the industry, implementation duration and implementation costs are not independent. Our research suggests that 67-percent of implementations take longer than expected, which leads to higher costs. Given the amount of resources, time, and money dedicated to an implementation project, even the slightest delays will affect the budget. The first step to having a realistic budget is to have a realistic implementation plan and timeframe, as the latter will always drive the former.
- Organizational change management and training. Proper organizational change management (OCM) and training is too often overlooked, with many companies and vendors over-simplifying OCM to equate to team training. Vendors and systems integrators will typically train the internal core team on how to use the “vanilla” software, but often fail to facilitate end-user training to reflect the software as specifically designed and built for the company. In order to be effective, proper time and money needs to be allocated to develop tailored training materials that employees can relate to in the context of their individual business processes. In addition, a host of other OCM activities – such as organizational gap analyses, employee communications and job design – needs to be incorporated into the overall implementation plan, which results in higher than expected costs for the less astute ERP customer.
These are just a few of the pitfalls to watch for when developing an ERP implementation budget, and a big reason why the average implementation runs over budget. If you’re budgeting for anything less than 4-percent of your annual revenue or four times your software license costs on your total cost of ownership estimate, than you may want to revisit your assumptions and expectations. By addressing all of the “hidden” costs in your implementation budget, you’ll be headed in the right direction on your ERP project. For more early-stage implementation advice, please join me at tomorrow’s free webinar, Tips for Building A Business Blueprint for ERP Systems (10 a.m. MT).