A company’s unrealistic expectations regarding total cost of ownership is often the first domino to fall in an ERP 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.
ERP vendors typically outline a one-dimensional estimate of the implementation costs for their ERP solutions. These estimates often fail to include hidden expenses, 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.
Below are some of the cost components commonly overlooked by organizations in both the 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 most 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 need to be incorporated into the overall implementation plan. This results in higher than expected costs for the less astute ERP customer.
These are just a few of the unexpected costs to watch for when developing an project 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.