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What does an ERP System Cost? 04/03/2009

Posted by TBoehm30 in ERP.
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How much does it really cost to implement an ERP system?

The very first cost to consider is the cost of choosing your system. Hopefully you’ve got a committee and they have designed their requirements and needs. These people will spend time away from their ‘day jobs’ to pick the best software you can afford. You’ve probably also paid for lunch a few times for all day meetings. Maybe you’ve hired a consultant to help drive this project – that costs money.

Then you get a good decision and go into negotiation for the software.

There are many factors that go into the calculation of cost. Let’s start with the easy ones:
Cost of Software. The price of software can range anywhere from essentially free to millions of dolloars. The free ones are generally web based or OpenSource. These are usually best for small companies that have grown to need a real system, but can’t afford to implement one. Tier 1 ERP systems, SAP, JD Edwards, and Microsoft are going to cost much more than any of the others.

The cost of software will generally depend on the number of users. Most vendors will charge you based on concurrent users. That means the number of people using the system at the same time. For global companies in different time zones, they can save money by buying less licenses, but using them during daylight hours in different parts of the world.

Software comes with lots of extras. Each of those extras will cost money. Every time you buy new software expect to spend money on extras. Things like report writers, optimizers, configurators, programming environments, etc. could cost more. Every vendor has parts of their software that they consider premium and so costs more.

The next cost of the software is the on going support costs. Most vendors like to keep you on the hook for a yearly fee. This covers the costs of upgrades and support. While you get ‘free’ upgrades, there is still work for you to do when it happens. Also, not all companies will provide any kind of support just because you have a contract. This fee can be anywhere from 100% of the original cost down to a very small percent of the purchase price or number of users.

Are you buying new hardware to run this software? You’ve got servers, operating systems, and databases. You might have virtual servers, Citrix, or other software needed for the new servers. Are you going to put the servers in a rack? That costs money. How about backup or UPS?

Have you considered the testing environment? You might want to purchase a duplicate set of hardware for your testing, quality, or development environment. Do you need to have offsite backups? Plenty of companies can help you with that. How about disaster recovery plans? You can outsource that if needed.

Then you’ve got simple things that are easy to overlook, like Microsoft Office. Do you have the latest versions on everyone’s computer? Does the vendor require the latest version to get the most out of their software? How about your network? Is it robust enough with a good bandwidth for your new project? If you have multiple locations, you can do offsite hosting for your servers, but that costs money every month.

Do any of your employees need additional training? Are they good with the latest versions of the software needed on their desktop? Will you need new reporting software, such as Crystal Reports? You might also need new IT support for servers, databases, reporting, customizations, etc.

Next you’ve got to actually implement the software. This will take consultants from the Vendor, numerous employees, and possibly other outside consultants. Anyone who is not an employee will obviously cost money. Your employees cost money when they can’t concentrate on their ‘day jobs’. Possibly you’ll need to hire temporary workers to help get through any tough times.

Expect the project to last from 3 months to 2 years depending on the scope of the project. During that time, there are numerous types of expenses that your company will need to cover. You may need extra computers for training, for pilots, for war room setup. You may be paying for kickoff parties, success parties, or meetings away from the office. Don’t forget about travel expenses for consultants and/or employees who need to go to different locations.

While the costs are great, the payoff should be even better. Putting in a good ERP system will give your company the ability to consolidate the books, measure costs, and control inventory. It can help with better Customer Relationships, and more efficient relationships with vendors.

Knowing the costs up front can help with the decision on buying a good ERP system. It is surprising how many managers underestimate the final cost of such a huge project.