There is a lot at stake when a business takes on an ERP project. The investment is substantial, and expectations are high, but so is the risk.
Most CEOs are not experts in ERP implementation. Even so, their leadership and careful decisions are indispensable to delivering a successful project; thus, CEOs should be aware of the costs and ROI expected from an ERP project, especially before they commit their company’s resources to an ERP project. Below are some cost considerations to understand before embarking on an ERP project.
What’s the ROI of my ERP project?
It’s important to have a clear understanding of what the estimated Return on Investment (ROI) is before embarking on your project. Sometimes, businesses can overestimate savings or underestimate the overall costs. Some of the benefits you can look at to get an idea of ROI are:
- Is there an inventory reduction?
- Is there a reduction in time employees spend doing certain activities?
- Can you measure enhanced customer satisfaction?
- Is there improved quality or increased enterprise-wide financial visibility?
It’s also a good idea to identify key areas for improvement, such as financial accounting, supply chain, production etc. And for each area, there must be key metrics that can be used to calculate cost savings and net benefits. The financial accounting area’s key metrics, for instance, might include cash-to-cash cycle, days sales outstanding (DSO), and monthly/quarterly/yearly closing periods.
The projected ROI can then be compared with the expected Total Cost of Ownership (TCO) to establish an economic case for the ERP project.
What are the actual costs of ERP software?
Knowing the TCO is a critical step in selecting an ERP vendor and product. TCO is typically split into several components, such as:
1. License fee
This is the price of ERP software that you must pay, usually as part of a subscription-based cost structure. The price usually varies depending on multiple factors, such as the number of modules and users and the customisation needed.
2. Consulting cost
Sometimes companies seek advice from independent consulting firms. Since selecting and implementing ERP can be risky, a consulting firm’s experience and expertise can mitigate those risks. When choosing, it’s important to ensure there isn’t a bias from the consulting firm for one solution over another.
3. Implementation cost
ERP implementation can be costly and time-consuming, and it is unlikely that your company can successfully implement the system without an implementation partner.
The cost for implementation can be higher than the license fee itself. It stands to reason, that the more complex and capable the ERP system is, the higher the implementation cost. You also need to consider the lost productivity when your employees join the implementation activities. It’s always preferable to engage with an expert ERP implementation partner, particularly one that has a depth of experience in your industry.
4. Annual license, maintenance/support fees
You will need to pay an amount to your vendor annually for the continuation of the software license and so your vendor will maintain the system and provide support. These fees may or may not be included with the annual subscription – different vendors offer differing models – or there may be separate fees to be paid. Additionally, bespoke developments, third-party add-ons and any other ancillary software associated with the ERP, will also attract their own annual license and maintenance/support fees.
5. Training cost
Training is an ongoing task. ERP systems are complex and, as best practice, training must be carried out before your employees can use the system. Furthermore, an ERP system can be expected to last a decade or more, so you will need to constantly provide training for new employees. Many organisations fail to plan to deliver an ongoing training programme to their employees or even fail to have any kind of ‘onboarding’ plan to train new employees on the ERP system. It is crucial to build these ongoing training costs into the long-term plan for an ERP system to ensure that your employees are getting the best out of the significant investment that the company has made.
6. Cost of IT
Aside from potentially having to make a significant investment in IT infrastructure (servers, clients, network devices) and software (operating system, database management, ERP licenses), you will need IT professionals to maintain the system, troubleshoot, and support users if needed. A rule of thumb is that for every 50 users, you need one IT professional. Factoring in what in-house IT resources you have is a critical step when considering investing in an ERP system.
Hear from Ian Bromley, CEO at Inixion
Ian Bromley, CEO at Inixion has over 30 years of experience in ERP systems and has managed over 200 ERP projects, globally.
“Choosing a suitable ERP solution for your organisation is a complex process and I know that many CEOs regard ERP implementation as a high-risk operation. However, the CEO’s role in ERP implementation inside their organisations is critical and shouldn’t be delegated to other roles in the organisation.”
“However, as our CEO-to-CEO guide will demonstrate, there are good reasons why CEOs should be involved in this critical decision at the outset. Because ultimately, it is the CEO that stands the most to gain from the success of an ERP system.”
Download our guide: CEO-to-CEO – the role of the CEO in ERP success to hear more from Ian on the key roles and expectations of the CEO in ERP implementation.