If your company is beginning ERP selection, you’re probably thinking a lot about cost. How much does system A cost compared to others? Does this fit within our budget? As important as these questions are, they miss the bigger picture – the total cost of ownership. In other words, how much will the implementation cost in addition to the cost of the technology itself?
A company’s unrealistic expectations regarding total cost of ownership is often the first domino to fall in an ERP failure. This leads to failure because companies end up cutting corners on activities that are critical success factors.
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Inaccurately estimating ERP project costs is more common than you might think. In fact, ERP vendors typically outline a one-dimensional estimate of implementation costs. These estimates often fail to include hidden expenses, like internal resources, external consultants and hardware upgrades.
Further, a software vendor will usually estimate implementation costs to be a 1:1 ratio between software licenses and technical implementation costs. This technical implementation cost is woefully low for most companies.
So, why do vendors make such low estimates? Sometimes, sales reps are trying to lowball their estimates to get the deal closed. Other times, sales reps do not truly know the costs required to make an implementation successful.
Common ERP Project Costs
Below are some common project costs, beyond the cost of the software itself. We recommend carefully quantifying these costs before investing in ERP software, so you can accurately weigh ERP business benefits vs. costs.
While these are not all the costs associated with an ERP project, they are the ones that are most likely to be overlooked during the budgeting and planning process.
1. Change Management
Many companies assume that the ERP vendor or systems integrator will handle this, but many don’t. Those that do, still require involvement from your internal employees.
Training, for example, is one component of organization change management that requires internal resources. Vendors and systems integrators will typically train the internal core team on how to use the “vanilla” software, but rarely customize the training to reflect the company’s unique software configurations and customizations.
As a result, your internal ERP project team must take charge of training activities. Not only should they customize training materials for software configurations, but they also should customize them for employees’ unique business processes.
In addition, there are a host of other change management activities that the internal ERP project team should be responsible for, including communication planning, business readiness assessments and focus groups, to name a few.
2. Business Process Management
Enterprise resource planning software presents an opportunity to standardize your operations across multiple locations and redesign processes that need improvement. This requires internal time and resources.
Don’t assume that the software will provide all the answers on how to run your business. Instead, recruit an internal team to help design your future state.
3. Resources for Backfilling
This might include contract or other employees you hire to manage the day-to-day activities of project team members who are no longer able to commit to their usual jobs.
4. 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 enterprise system.
In addition, IT staff often need to be augmented with additional resources, training or outside consulting to support the new environment.
These costs are significant. Many companies implement cloud based solutions to save money on resources and infrastructure.
5. Longer Than Planned Implementation Duration
How to Scope Your ERP Project
Your project scope directly influences your project budget. While many organizations scope their project based on number of modules or number of users, we recommend considering other factors, such as the scope of change required to achieve business goals and your employees’ level of change readiness.
Here are three tips to keep in mind when scoping your ERP project:
1. Account for the complexities of your business.
Is your business relatively simple, or is your business a complex set of business processes supporting a diverse line of products? Be sure to get an independent view of your organization’s complexity when planning your ERP implementation. In other words, seek input from someone besides the person selling you the software.
Many complex businesses need a full ERP software solution that addresses all of their functional areas (human resources, supply chain management, etc.). Less complex companies may be looking for a point solution to address one specific area, like customer relationship management. Standalone CRM software or human capital management software can be integrated with a company’s main ERP system to extend the functionality.
2. Focus on people and processes.
Technical activities are rarely the cause of project scoping issues. Instead, the primary causes are related to business process reengineering and change management activities. For example, failing to improve your business processes before selection can lead to unexpected costs during implementation.
3. Benchmark against other organizations.
We have all heard the anecdotal stories about what to expect from ERP projects. However, these isolated examples are rarely indicative of what the average project looks like. We recommend looking at broad sampling of organizations similar to yours to gain an understanding of what your project costs may be.
For example, our 2019 ERP Report reveals that SMBs use an average of seven full-time internal resources, and large enterprises use an average of 24 full-time internal resources. This does not necessarily mean that these people were committed 100% to the project. While some organizations may have had seven people spending half their time on the project, other organizations may have had 14 people spending a quarter of their time on the project.
How to Control Costs
There is a fine line between cutting costs to save money and undermining the success of an EPR project. Cuts to ERP budgets that look good on paper can have disastrous consequences in the long-term.
Here are a few tips to help you control project costs without cutting essential activities:
1. Set realistic expectations.
More often than not, ERP vendors and their system integrators mismanage expectations on what total costs will look like. This makes it difficult for your company to set realistic expectations. As a result, you may end up presenting an inaccurate business case to executives.
When you realize your mistake, you may find that executives aren’t willing to increase the budget. While you may still encounter executive resistance if you have realistic expectations upfront, this is much less painful than losing your job because you set unrealistic expectations that resulted in a botched implementation.
Our ERP selection methodology helps clients develop a realistic business case. A business case should be used for more than just convincing executives to approve the project. It should also be used to prevent budget overruns.
2. Detail each of the cost components.
Setting realistic expectations requires an understanding of all essential project costs. This includes the obvious costs as well as the hidden costs: hardware upgrades, maintenance, internal resources, external consulting support, customization and a host of other budgetary items that companies often overlook or underestimate.
If you’re not sure what costs to include, we recommend developing a project plan. When we help clients develop project plans, they typically avoid incurring unexpected costs.
Once you have identified all the major cost components, you can then benchmark these line items to actual costs for companies similar to yours. Our 2019 ERP Report can be a good starting point for setting realistic benchmarks.
3. Respect the “untouchables” of your ERP budget.
There are certain, critical elements of an ERP project that should never be considered for the chopping block. One example is organizational change management. On paper, it may appear that you could save millions of dollars by removing all change management activities from your project plan. However, this doesn’t reflect the financial impact of employee resistance, project delays and other common risks of neglecting change management.
On the flip side, you will want to identify the areas that you can remove from your budget if necessary. For example, customization is one area that many companies decide not to spend too much money on, and this usually has few, if any, consequences.
As a general rule, if you want your project to be successful, then your budget should reflect a heavier focus on the business aspects of the project rather than the technical aspects.
4. Take your time during ERP selection.
Too many companies rush into ERP as if the world is going to end without it, and they don’t take the time to clearly lay out their business requirements. We recommend involving employees in ERP requirements gathering sessions to ensure your potential ERP solution can support the most important processes from each functional area.
One of our recent clients saw significant cost savings during implementation by investing in a thorough selection process. The CFO of the organization commented that the investment in selection did not increase the total project budget because money that would have been spent later in the project was simply spent earlier.
5. Negotiate with ERP vendors.
Did you know vendors may give you a discount if you negotiate with them? It’s true!
However, this is easier said than done, so most companies that want to negotiate their ERP software contract, hire an expert. When we help clients negotiate with vendors, we provide a total cost of ownership analysis that helps clients compare software contracts. In addition, we typically conduct three to four rounds of negotiation to reduce licensing fees and implementation costs.
How Much Does ERP Implementation Cost?
If you want an accurate estimate for your project, be sure to accurately scope your project and account for some of the most overlooked costs. Panorama’s ERP consultants can help you set realistic expectations that won’t scare executives nor get you fired for causing budget overruns.