We still find organizations to be highly focused on the potential license costs of software as they first embark on an ERP evaluation and selection process. They only want to include a specific tier of software in their long-list with the assumption that software gets more expensive as you move towards Tier 1. This assumption is not entirely accurate, and we stress to not even consider tier or software costs at all in initial evaluations. Here are some thoughts behind this recommendation:
Software licensing is certainly a critical piece of total cost, but realistically it is going to run less than 30% of total cost of ownership. You will hear plenty of 1:1 and 1:2 quotes, but these are often from software vendors with the assumption that everything is out of box, integrations are not of consequence, users are all happy, ready and skilled enough to jump into the new environment and that there will be no issues with data. If you think that might be realistic for your company, then go buy a lottery ticket, as the odds are about the same.
Varying deployment models are making cost estimates all the more difficult. Across SaaS, on-premise, hosted, hybrid, etc., the variations on costing and assumptions and fixed vs. variable fees that go with each deployment model can be frustrating to navigate and impossible to estimate in the early stages of evaluation. This should be a key consideration as you navigate your SAP S/4HANA vs. Oracle Cloud ERP vs. Microsoft Dynamics 365 software decision, along with other systems you may be considering.
Cost of software is based on functionality. Essentially, getting the right fit software MUST be the determining factor in your decision. The reason that Tier 1 ERP software platforms like Oracle and SAP get a bad rap on costing is that they carry far more functionality than other platforms. If you need this level of functionality, purchasing a lower-tier solution at lower licensing fees could potentiallyincrease your cost of ownership as you will need to customize and tie many best-of-breed modules together, not to mention the concept of opportunity cost.
Negotiation leverage is misunderstood. Software is a pre-written code, and once developed it is being sold at essentially 100% margin (less sales costs, etc.). There are other factors that will come into play such as implementation services, training, maintenance, upgrades and on-going support. The on-going fees provide revenue stability for a software vendor and may be more critical than initial license fees. This allows for significant leverage during negotiations and basically negates the concept of retail cost. This is especially the case in Tier 1 markets.
Finally, remember that software vendors are trying to win your business. Until you have explicitly clear direction on your future state requirements and processes, solution architecture and points of integration, they will assume the best-case scenario to keep estimated costs down. More definition will come as you approach demonstrations and implementation approach, which realistically should only be done with your selected short-list of vendors. This is a risk that should be considered for Deloitte, Capgemini, Accenture, and other system integrators as well.
If you are sending out RFIs to get initial feedback on functional fit and cost, be cautious on costing estimates out of the gate unless you are working with independent ERP consultants that can provide more guidance around the estimates. Once you have sorted through your long-list to find the solutions that fit your needs, then take a look at building out your total costs including license fees.
Third Stage Consulting Group is a global thought leader in business transformation, ERP software systems, operational change management, and business advisory. Let us take your organization’s digital transformation to the Third Stage.