How much ERP costs and how to set your budget
Asking how much ERP costs is akin to asking the length of a piece of string so it’s no wonder buyers can so easily get their heads into a spin. Setting a budget for a new ERP requires planning and forethought along with a thorough understanding of what your particular business needs.
An ERP implementation can cost anything between $150,000 and $750,000 for a mid-sized business. This is a pretty broad benchmark so, in order to plan a more accurate budget, you will need to consider the specific requirements for your business. In this in-depth article, we will run through the steps to setting a budget for an ERP system that is specific to your organization.
1. Components of a budget
Even if you already have the green light to invest in a new ERP system, you will need to set your budget and justify the costs. While not all of these components will apply to all implementations, they should all be considered in order for you to decide which ERP is right for your business. Here are some of the key components to ERP cost planning:
- Software licensing fees
- Additional servers and network hardware
- Data conversion and transfer to new ERP
- Customization if necessary
- Vendor/consultancy support post implementation
These are the most tangible costs to include in your budget but you also need to think ahead to budgetary banana skins and make room for contingencies. We will go into the hidden costs a little further on.
2. Justify the cost of new ERP software
Speeding up order to cash cycle, increasing productivity, improved business intelligence...ultimately though, ERP software needs to be justified with a solid ROI projection.
There are many reasons a business would want to buy a new ERP system. Among the most common are increasing productivity, improving business intelligence resulting from better data capture and analysis, accelerating order to cash cycle and reducing labor costs. However, when other business units are also shouting for budget allocations, you need to be sure that you can not only justify the expenditure now but that it will prove to be justified later.
You will need to justify the cost by choosing the right pricing model for your business as well as being meticulous about exactly which features and modules you need and what you expect your ERP to deliver in financial value. Not all modules will benefit all businesses, so make your decision carefully.
- Financial management
- Sales and marketing
- HR management
- Inventory management
3. Decide which pricing model suits your company best
There are two readily accepted pricing models for ERP purchase, each with their own set of pros and cons. There are also hybrid options which borrow parts from each model, but in order to grasp what will work best for your organization, you need to understand the main differences between these two.
The perpetual licensing model (aka on-premise systems)
This model allows a business to host the software on their own servers on-premise. It can be a wise choice for large businesses but more difficult to manage for smaller businesses without the infrastructure already being in place to support it.
The initial outlay for sufficient hardware can make this model challenging for small businesses but for those with existing hardware capacity, it can actually be a cost-saver. Here are the main pros and cons:
- Well-defined cost of ownership
- Allows permanent use of license without ongoing subscription costs
- May offer lower total cost of ownership (TCO) for larger businesses over time
- Upfront costs for onsite infrastructure can be prohibitive for medium and small businesses
- Can be expensive to scale as a business grows due to the need for further infrastructure upgrades
The SaaS subscription model (aka cloud-based systems)
The SaaS model is increasingly popular with smaller businesses with their eyes on growth and flexibility. Given that this model incorporates cloud-based hosting, a small business need not invest in a hefty infrastructure overhaul or large upfront license fee. Of course, it is not the best fit for every business so here is a quick snapshot of the SaaS pros and cons:
- Subscription pricing can be based on user numbers or transaction volumes to give greater flexibility and scalability
- Lower upfront costs due to lack of necessity for on-premise hardware extension
- Lower initial outlay for license
- Ongoing subscription costs could outweigh the costs of Perpetual License for larger businesses that could have utilized existing infrastructure on-premise
- Sudden spikes in demand can increase costs under any on-demand license agreement, making cost management more complex over time
In order to choose between the two, you will need to undertake an audit of your existing infrastructure, project your user/transaction growth rate and take other ERP implementation costs into consideration.
4. Decide which features you need
One of the biggest pitfalls in any tech investment is the potential to be oversold. There are many features that sound exciting but you will never use, whereas some may be needed later. To calculate the right ERP budget and invest wisely, choose only the features that you need.
Must-haves will usually include accounting, financial management tools and inventory management, but not all will need a B2C commerce interface or CRM module, for example.
There could also be features that you don’t need today but might need in the near future. For example, you might not need multi-currency or multilingual capabilities in your financial module right now, but if you are soon to be launching in new markets, it could be cheaper to include these features from the outset rather than having to retrofit later.
5. Calculate installation costs
Installing the software itself will vary from provider to provider and from enterprise to enterprise, especially if you are going with an on-premise model but do not yet have sufficient infrastructure to support it. In order to fully understand installation costs, you will need to audit your current infrastructure to see if it measures up to hosting the software and then calculate the costs of expansion.
Forecasting for hidden costs
The most common hidden, underestimated or just plain forgotten costs of ERP implementation are staff training, unanticipated customization and data conversion. You can mitigate many of the ‘hidden costs’ by anticipating the extra work, training, and features that your new ERP requires. However, there are often costs that come along later, after implementation, that you need to make provisions for.
Sometimes, despite the best planning, you may find that you need to re-engineer some of your internal processes; this can take time and resources that you had not planned for. If this won't work, then you may need to go back to your vendor for customization that you didn’t originally budget for.
This, in turn, can mean retraining too, meaning more time and more resources you hadn’t planned for. However, there are often hidden bonuses to implementation that will counteract the costs, and having around 10% contingency budget built into your ROI projections will stand you in good stead for any unforeseen expenditure.
6. Compile your budget
Now that you have given some thought to what you expect from your ERP, what you do and do not need and which pricing model might be the best fit for your business, it is time to start getting in the quotes. Vendors and consultants can give you guidance and you can make comparisons accordingly.
Use the vendor quotes to help hone your budget forecast but always be mindful of future costs, agility and ensuring you choose the features that will deliver a tangible benefit to your organization.
Forecasting your ROI
After much deliberation over budgets and costs, it is equally important to project expected returns. Assigning a value to your ERP implementation means going back to the original reasons you started the project. Reporting on cost-savings resulting from your ERP may even extend beyond those original objectives. Here are some of the main areas to look for an ROI:
- Labor cost reductions: did you actually eliminate excess resources or simply allow them more thumb-twiddling time?
- Improved cash to order cycle: have you seen the improvements you projected when you first set out?
- Supply chain management: have you seen improved quality, reduced prices, improved inventory management?
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