How to build an ERP RFQ
You’ve talked to a range of ERP vendors. You’ve read, re-read and clarified the RFPs from your shortlist. You’ve done every reference call and site visit allowed; it’s time to start talking price. You offer each company on your ERP vendor shortlist that you believe could provide you with a viable software solution an RFQ (request for quote). This is the process by which the ERP vendor formally tenders a price for the requirements they intend to fulfill.
Be prepared to be initially confused by the results of your ERP RFQ. Most software vendors do not put effort into simplifying their pricing, and this is complicated stuff. You will likely have to study the RFQ carefully to fully understand it.
There are some questions you may ask to clarify your RFQ responses:
- Is your vendor selling a single ERP software package for a single price, or are they selling you multiple modules comprising a total package (cafeteria style)?
- If your vendor is pricing for multiple modules, are they charging you a flat fee per module, or charging you per license?
- If not per license, are they charging you on some other basis, like purchase orders generated, invoices created, etc.?
- What if you purchase an additional module two years from now?
- How is annual maintenance structured? What is it based on?
- Are there multiple levels of maintenance service offered in the RFQ?
After you have studied the RFQ, and think you understand it, imagine purchasing a company approximately half the size as your own, and standardizing them on your ERP package. If you understand fully what your immediate out-of-pocket expense and annual increase in maintenance would be as a result, then you probably do understand the RFQ pretty well. If not, study it some more.
The RFQ should detail (a) the initial expense to acquire and load the appropriate ERP software modules, and; (b) the annual cost of maintenance. These two figures, cumulated over a fixed time period represent the total cost of ownership. The total cost of ownership is the bottom line number to use when comparing relative economics.
Amortize the cost of ERP software
The key question about calculating the total cost of ownership is how long to amortize your ERP system. Imagine that you have two vendors with approximately equal ERP software solutions. One vendor charges a high amount up front for the software but has relatively low annual maintenance. The other has very low software selling price but charges dearly for maintenance. In that case, the cumulative total cost of ownership will intersect at some time in the future. The life expectancy of the ERP software that you use to calculate payback could determine which has the apparent economic advantage.
In the end, these are numbers, and you should be very much in command of them. It will be one of the few tangible factors in decision-making. Considering economics in ERP requires a careful balance; while you want to be a responsible steward of the company’s money, there is no amount of savings that can make up for a failing ERP software solution. Consider economics carefully, but do not depend upon them exclusively for your decision.
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