Understand the costs of ERP

Like all essential solutions, ERP comes with an associated ongoing cost of ownership.

October 29, 2013

Like all essential solutions, ERP comes with an associated ongoing cost of ownership. But careful planning and new delivery models make ERP total cost of ownership (TCO) manageable, says HansaWorld.

Taryn Cromie, sales manager at HansaWorld South Africa, says not all enterprises fully understand the costs associated with an Enterprise Resource Planning (ERP) system. “We tend to have this discussion with customers quite often – it is an area that is not well understood,” she says.

What are the costs?

Cromie says the total costs of ERP can be broken down into:

  • The upfront investment in the software. This is a once off cost that is often negotiable and will depend on configuration and features.
  • An annual license and maintenance fee – typically some 20-25% of the initial software price (this is an on-going cost).
  • Implementation and training costs and this may include the cost of specialist ERP consultants.
  • Then, depending on the system, related and supporting hardware and licenses such as a database server, or Citrix for wide area networking, a print server, or Windows licenses, may also need to be taken into account.

Eckhard Wernich, HansaWorld Regional Manager, says surveys conducted in Europe indicate that the maintenance and running costs could be well over four times the initial cost of the system, over a seven-year lifetime cycle, depending on the system and its architecture.

Over-customising an ERP system can also lead to unexpected costs in future, notes Wernich. “If the developer leaves the company, managing a highly customised system may cause serious challenges in future, as his successors attempt to cope with new releases and advances. This also adds to the cost of operations.”

Outweighing the costs

The cost of an ERP implementation, notes Wernich, is offset by the multiple benefits, such as increased efficiency and a reduction of manual work, with an associated reduction in the number of staff needed.

By removing operator input, errors are also controlled or eliminated, which further contributes to a reduction in operating costs. Automation of key processes reduces the number of administrative staff required and costly errors. The cost of having IT specialists on site can be considerably reduced by having tasks such as backup and recovery procedures and automated database management incorporated.

An eye on the future

An effective system also positions a company to grow. It is no longer bogged down with solving operational problems, but is free to focus on business itself. And the right software should be ready to support that growth with the ability to scale from its initial size and configuration without disruption or the need for replacement.

Wernich says careful planning ensures that the upfront cost of the ERP system is controlled. “Companies need to carry out a full pre-analysis to determine what functionality is necessary to invest in, and what is not,” he notes.

In the Cloud

Cromie says that ERP costs can also be managed through new service delivery models, including Software as a Service, which allows enterprises to reduce their upfront outlays on hardware and resources. Organisations considering migrating their ERP system to the cloud at a future date need to ensure that the solution they use is cloud ready and simple to migrate, she adds.