Controlling ERP Project Costs

Written By: Guest Blog
Date: August 27, 2021

Sam Graham

Every year, many ERP implementations fail or at least fail to deliver what was expected of them, but even the ones that are successful very often exceed their initial budget. To make matters worse, the modules of the new system that contribute most to ROI are often towards the end of the implementation plan. These can be the most difficult to implement, and in the end, these are the ones that get ditched when the money runs out.

Establish a Clear Understanding

The first thing that any organization must do when contemplating an ERP project is to satisfy themselves to have a full and comprehensive understanding of what they will be getting into and, as part of that, they need to satisfy themselves than an ERP system is going to deliver what they expect of it.

For example; ERP requires discipline but it can't make people disciplined; it needs people to change but it can't change them, and it needs departments to cooperate but it can't force them to.

Organizations need to understand why they are implementing ERP. They need to know that it is the correct tool for their purpose: buying even the best hammer to drive in screws is rarely the best solution. It really comes down to which tool will be the best fit for their business so that they can have an easier time preparing for the overall costs of the project.

At the outset, it's important to know what ERP can do and, just as importantly, what it can't do. ERP is a brilliant enabler and, in fact, many companies benefit most by understanding that they have to change and then by analyzing what they do, how they do it, and why they do it and the actual implementation is often just the icing on the cake. When companies understand what ERP is, they can begin to understand what is required to implement it and to make it work.

As previously suggested, an ERP system is not just something that is plugged into the wall and runs. It requires a lot of knowledge, expertise and effort to make it work well. That can be more commitment than most companies expect to have to make.

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Commitment to the Change

The commitment must also include a commitment to change because implementing ERP successfully often means radical change for the organization, and that is not easy for some companies. Some, such as start-ups, thrive on it but many find it difficult and indeed painful. Additionally, when a company implements ERP, buy-in is not always unanimous and there can be anything from lack of enthusiasm to actual resistance in some areas.

If companies are not unanimous in their desire and determination to implement ERP, they are not ready as an organization to do so. If they believe that they are ready for ERP and that it is genuinely the answer for them, after analyzing and documenting their requirements (and only then), their thoughts can turn to selecting a system suitable for their needs.

Many are tempted to make what can be called a 'vanity purchase'. They are enticed by the thoughts of telling their trading partners that they are implementing 'Megasoft'; just like the big companies. The reality is that, if they are not a mega-company, they may not actually need Megasoft or any other Tier 1 system.

The Unnecessary Costs

The first unnecessary cost comes from buying a system that is bigger and more complex than is actually needed. The thing is, Tier 1 systems also need more consultancy time to implement (and their consultants are more expensive) so the costs keep mounting.

Then, yearly maintenance fees, which are based on software license costs and can be up to 30% per year for a Tier 1, kick in, and running costs are in consequence higher than they need to be for the entire life of the system.

Some companies tell themselves that they need a big system because they themselves are big, and sometimes they are right. But many big companies are actually a group of smaller divisions or companies that operate pretty much independently of each other and only need consolidation at the General Ledger level. It can often be cheaper, and better, to allow these business units to operate Tier 2 (or even Tier 3) systems of their own choice that are better suited to their needs.

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The next step is to look carefully at what they actually need. Most ERP systems offer an impressive range of functionality, delivered through a range of 'modules', and although many of these are enticing, few companies need anything like all of them. Here, they may then buy the CRM module but not use it properly; or they may buy the capacity scheduling module when they really only need capacity planning. Companies shouldn't buy modules 'just in case' or 'just because they are there.

The Risks of Customization

No ERP system is ever a perfect fit for any company that buys it, there is always a temptation to pay for modifications and enhancements to get the perfect system. The reality is that an enormous amount of money is wasted on modifying software. One Tier 2 supplier has reported that only 30% of the bespoke work that they do for clients is still in use three years after go-live. The rest was found to be unnecessary after go-live.

Regardless of the size of the system chosen, all companies need help with their implementation, and that means using consultants. Ironically, using too little consultancy can be as costly as using too much, because it means that things will get skimped or missed and a lot of work will have to be redone as problems emerge.

In fact, when unplanned work has to be carried out, it usually takes longer and costs more than if it had been properly scheduled in the first place. It is true that to avoid this expensive rework, some companies will accept a substandard system but, whether or not they are right to do so is, at least, debatable.

The Value of Consultants

Is there such a thing as using too much consultancy? In Tier 1 projects, the consultants are frequently counted in dozens or, indeed, hundreds, so companies need to be very careful that they are getting value for money. Even if only a dozen or so consultants are involved, it ranges from difficult to impossible for companies to know what each is doing at any one time. If they have 12 on the project; would 11 or even 10 actually have been enough?

The reality is that nobody becomes an experienced ERP consultant overnight and, in any large implementation there will be a percentage of new or inexperienced consultants who have been assigned to the project primarily to gain experience; albeit at the customer's expense.

Companies need to manage their consultants, even though they can't supervise them. To do that, they need to know what the consultants should be doing and how long those activities should take. If they are lucky, they may have someone on their staff who has recent relevant experience of implementing a similar system, but they will often have to speak to a genuinely independent ERP consultant (i.e. specifically not their implementation consultants or system integrators).

Taking independent advice will eat up a fraction of one percent of the overall budget but will give them the knowledge required to question and to challenge their implementation consultant's recommendations and decisions. They will also be able to assess any project plans that are placed in front of them to ensure that they look both realistic and reasonable.

Closing Thoughts

One last thought on monitoring progress against the plan; and is that companies need to simultaneously monitor spend against the budget. They might feel pleased that 30% of the way through the project, all activities have been completed on time but if at that stage, 50% of the budget has been consumed, then they have a problem. When it comes down to it, ERP projects are expensive but they don't have to be unnecessarily expensive.

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I hope you found this information useful and if you have any questions or would like to brainstorm ideas related to the costs of your ERP projects, don’t hesitate to reach out to my friends at Third Stage.

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