Hidden and Not-So Hidden Costs of ERPs

road to putting the right ERP in place can be an arduous one. Between conducting thorough organizational research to gathering requirements, scouting qualified offerings, meeting with vendors, product selection, then actual system implementation, there is a lot to be done. Vendors and resellers give customers a decent idea of ​​how much their ERP will cost, however, most will find out that quoted price only scratches the surface of the Total Cost of Ownership (TCO) . So, if you think you know how much your legacy on-premise ERP is worth, the following might be a revelation. Here are a few cost considerations that go under the radar.

Software Licenses

ERP licenses are usually a combination of two prices: the number of modules in the system and the number of users who will be using it. The most basic price advertised is typically indicative of a simple accounting package with each additional module adding to the software's price tag.

While volume discounts are typically applied to the initial license purchase, companies will probably not get their total user count right from the start. A part of the manufacturing floor may have been missed and not realized until mid-implementation. While rolling out the solution, a particular department may suddenly find a used case for a new integration. For example, a VP of sales may see a user logging into a mobile inventory app with live data of their warehouse stock levels. Now, they have a similar use case and their field sales team wants a sales order solution. This creates a need for a new module and additional licenses not originally accounted for. This concept is often referred to as Minimum Viable Product (MVP) .

In addition to the actual licenses, companies will need to budget for annual maintenance on the licensing. Annual maintenance generally accounts for 20 to 22 percent of the initial licensing purchase when buying on-premise. Over time, however, those maintenance rates typically increase every three to five years.

Labor

You may have already scoped out how many hours will be needed to implement your ERP solution and go through the workflow. Getting this right is easier said than done. Entering data into the software can easily take up far more time than anticipated, especially if certain records are on paper.

Transferring data from a legacy system to a new one, for example, can be extremely time consuming. Newer systems use updated databases that may require significant alterations. For instance, your legacy system may be built on SQL while the new one you are considering uses MongoDB. In such a scenario, migration can require significant effort as relational databases use a very different schema than document-based ones.

Next, staff will be needed to implement and run the different modules of your ERP system. Many companies hire dedicated consultants to help with getting the most out of their ERP systems. These consultants often stay on the company's payroll for a long time as training and knowledge transfer to the company's end users can take time.

Training

If there's one item that everyone agrees is an ERP budget black hole – it's training. Training expenses usually exceed their allotted thresholds because companies tend to overestimate our ability to learn something and adapt to new processes with little resistance to change.

If the end users are comfortable with pre-made Excel spreadsheet templates, for example, then using a new ERP system with detailed report generators and dashboards may seem overwhelming at first.

People also learn at widely nonsense speeds. Across any training exercise, some employees will get a better grasp of the concepts than others. Certain employees need more time before efficiencies are instilled in their day-to-day tasks.

Integration

Testing is another phase companies tend to get stuck on. Vendors often provide integration services either as part of their core offering or at a fee. If a company tries to run the integration itself, then it can expect to run into significant overhead costs. There are quite a number of questions you have to answer before getting underway – how many users, number of modules needed, number of databases that need to be integrated, etc. You should also expect to pay a consultant to assist with the integration efforts.

Testing

The testing phase of an ERP solution can be extremely time consuming as organizations will want to find any kinks right at the start. As much as 50 percent of an ERP's implementation budget is consumed in testing alone, so cost overruns are to be expected. ERP testing falls into two categories: manual and automated. While manual testing is more thorough, it requires a greater investment in time and resources to see through. Automated testing tools, on the other hand, run scripts providing detailed performance reports, however, they lack your employees' creativity in challenging the system in unexpected ways.

Conclusion

Gartner found that as many as 75 percent of all ERP implementations fail, which can be quite an eye opener when you consider the amount of time and money companies spend trying to learn that. Of course, you can circumvent the whole problem quite easily by going postmodern instead, too.

Postmodern ERP was created partially in response to the unwieldy, install nature of monolithic systems and is designed to help you avoid cost overruns. It does so by letting you integrate software you already have a high degree of confidence in using and systems you are familiar with.

Interested in learning more about postmodern ERPs and how they can help slash your operating costs? Let's have a call and discuss how we can build a stronger rollout strategy for your customers.