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As we outlined in our ERP predictions for 2012 and our look back at the ERP industry in 2011, one of the major issues that CFOs, CIOs, and other c-level executives are and will continue to focus on is how to reign in ERP costs. Unfortunately, despite their best intentions and their relatively low risk tolerance given the current economic climate, most organizations still see their ERP implementations take longer and cost more than expected. As a result, executives are watching their ERP budgets like hawks and looking for ways to control costs.

The problem these executives face is that there is a fine line between cutting costs and undermining the success and effectiveness of an implementation. Too often, cuts to ERP budgets that look good on paper can have disastrous consequences in the long-term (e.g., cutting organizational change management and training budgets), so it is important to understand where it makes sense to pragmatically minimize costs versus taking the slash and burn approach that could create a “throwing the baby out with the bathwater” situation.

Here are a few tips to help executives and project managers control and maintain costs within their ERP budgets:

1. Begin with realistic expectations. This is often the root of budgetary issues and cost overruns. More often than not, ERP vendors and their system integrators mismanage expectations on what total costs will look like, leading organizations to cut corners down the line when they realize that they never had the right budget to begin with and find that their management team isn’t willing to increase the required funds. It may be more painful to have clear, realistic expectations up front, but it is much less painful than losing your job because you can’t manage to the budget, or worse yet, losing your job because the implementation was botched due to lack of resources. Panorama’s ERP software selection and implementation planning methodologies help clients define (and budget for) these more realistic expectations from the start.

2. Detail each of the critical cost components of an ERP implementation. You can’t have realistic expectations without a realistic view of what each of the budgetary cost components will need. This includes hidden costs: hardware upgrades, internal resources, external consulting support, customization, and a host of other budgetary items that executives and project managers often overlook or underestimate. Once you have identified all of the major cost components, you can then benchmark these line items to actual costs for companies and industries similar to yours — not unrealistic “back of the envelope” low-ball guesses that your vendor or system integrator might provide during their sales cycles. Panorama’s 2011 ERP Report and other independent research can be good starting points for these more realistic benchmarks.

 3. Understand the “untouchables” of your ERP budget. There are certain, critical elements of an ERP implementation that should never even be considered for the chopping block: organizational change management and project management expertise, for example. Just like any investment portfolio that your company pursues, you will want to identify the areas of the project that you are willing to invest heavily in and those that you are willing to spend less on if push comes to shove. For example, customization is one area that many companies decide not to spend money on, and rightfully so. And here’s a hint: if you want your implementation project to be successful, then you will want your budget to reflect a heavier focus on the business and organizational aspects of the project rather than the technical aspects, which are typically not only the easiest parts of an implementation but also the areas the system integrators and vendors tend to over-emphasize.

Setting an ERP budget that is aggressive while at the same time realistic is easier said than done. You have to have extensive experience with ERP implementations, be objective and independent when defining the budget, and understand the full spectrum of costs outside of the direct vendor-related technical costs. At Panorama, we help our clients define a realistic budget, along with appropriate areas of focus, as part of our ERP implementation planning service offering and PERFECT Path methodology. Without this focus and understanding, organizations are walking into a black hole of uncertainty and risk. Find out more about ERP implementation success by attending our January 12th webinar, Lessons Learned From Best-in-Class ERP Implementations.