Determining Your ERP Total Cost of Ownership

Written By: Eric Kimberling
Date: March 14, 2019

One of the first questions we are asked when discussing an ERP initiative with a new client is “how much is this whole thing going to cost us.” The easy and accurate answer is: “we have no idea at this time.”

Unfortunately, executive committees and board members generally won’t accept this answer and need to have an initial budget in place before approving anything. Problems arise later when this estimated number turns out to be only a fraction of the actual total cost. This is a common challenge during the ERP software sales process.

We recommend you consider the following before putting any numbers before a board:

1) First, understand what “budget” they are asking for. If you can get agreement on only providing estimated software costs at this time, then that makes life a bit easier. There are still a number of assumptions to be made with software, but beyond that it can get far more confusing. These and other factors need to be considered in when estimating the implementation time and cost for your SAP, Oracle, or Microsoft Dynamics implementation.

2) Use estimated deployment model and phasing assumptions accurately. “Cloud” or “SaaS” subscription models do not necessarily mean cheaper, however may reduce initial investment and spread costs over a greater period of time. Similar to phased implementation, if you are being asked to provide first year costs, this could have significant impact.

3) Consider necessary business process changes. A new software will inevitably require process adjustment across the organization. New processes don’t simply take hold once a system is live and they need to be defined, designed and implemented along with the system. This may require a fair amount of consulting support as well as internal resourcing and can be a significant impact on total cost.

4) Consider the impacts of new processes. Process change falls beyond system training and will require people to learn new jobs, roles and responsibilities. With this comes potential resistance which will require additional training, communication, alignment, and other organizational change strategies. This all costs money.

5) Consider integration costs. Most companies today have a multitude of systems in their inventory or have a need for bolt-on technology to some degree. Fortunately, the ease and cost of most integrations is becoming less significant, but it cannot be overlooked. Take special note of any legacy technology that may require custom integration that may not have been done before and build appropriate cost into the budget.

6) Don’t forget contingency. Contingency cannot be designated to cover any costs that you know are going to be incurred, rather it is a place-holder for unknown costs. This is one of the greatest errors we see when budgeting for an enterprise systems implementation. Be sure to understand how to define your ERP contingency budget when planning for your transformation.

Of all the places to ask for help in budgeting, don’t ask a software vendor or reseller just yet, as the cost will undoubtedly come in low. Also be wary of internal estimates as each department will have different incentives and perspectives on how to budget for such a significant initiative.

Get the internal ground rules set and reach out to an independent ERP advisor to help from there. There will likely be some pre-work that is needed before an accurate budget can exist, so maybe try pushing for an initial spend to help structure a realistic approach and budget.

Eric Kimberling
Eric is known globally as a thought leader in the ERP consulting space. He has helped hundreds of high-profile enterprises worldwide with their technology initiatives, including Nucor Steel, Fisher and Paykel Healthcare, Kodak, Coors, Boeing, and Duke Energy. He has helped manage ERP implementations and reengineer global supply chains across the world.
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