Much is written about buying a management system . Some say it looks like buying a house, others like buying a car. There are even those who think that it is not a purchase and that incorporating an ERP in the company is comparable to a civil engineering project , such as the construction of an industrial plant.
Although the discussion about the similarities is interesting to better understand what a project to implement an ERP is about, at this point we will write about an important aspect such as the cost of an ERP.
There are other costs, not just licensing
When companies are about to contract an ERP system, they spend a good amount of time “haggling” the price of licenses but do not pay attention to other costs such as maintenance, support, implementation, updates and the cost of the people in the organization who will be there. involved in the project.
What are the hidden costs of a management system?
Unrealistic expectations of the user company regarding the cost of an ERP is often the first mistake made when planning an ERP implementation. Without a realistic, generally undersized budget, they end up cutting back activities that are part of the critical success factors, tracing the route to an unhappy completion.
According to the data that ERP experts collects in its studies, in America, companies plan to invest in the order of 1.50% to 2% of their income in ERP projects when they begin the evaluation and selection process. However, most of the time the actual budget is higher than expected.
Part of this gap is a consequence of under-dimensioning the cost of an ERP. These estimates, very often, do not include the hidden expenses associated with ERP implementations, such as internal resources, external consultants, hardware upgrades, and a host of other elements necessary for the success of the project.
How is the cost of an ERP estimated?
Typically, the ERP cost estimate by user companies is a 1: 1 ratio between software licenses and technical application costs - that is, $ 1 in investment per implementation for every $ 1 invested in software .
At the end of the projects, it is observed that this approach is not entirely correct.
Based on our research, a closest ratio is in the range of 1: 3 or even 1: 4. In other words, every dollar invested in ERP software licenses results in an investment of $ 3 to $ 4 of total implementation costs.
How much does an ERP cost?
Instead of talking about the cost of the ERP, we should think about the cost of the project, that is, of the software, the implementation tasks, adaptation, training, data migration, etc.
We have been working on this for the last 12 years. We created a demand observatory, that is, a device to collect information from companies that have business software projects. With each of these 3,500 companies that we contacted, in 80% of the cases we spoke with the people who were searching for software for the company, asking them about the reasons why they wanted to change or incorporate ERP software, what were the areas that most requested it, which management of the organization has budgeted for the project, what is the amount assigned to the investment, how many users will the new system have. The cost of an ERP project should not exceed 2% of a company’s turnover.
What are the maintenance costs?
Annual license fee
For many years, it has been accepted that, in order to have access to updates and new versions of the products, the customer must pay a cost known as the “Annual Support and Maintenance Charge” or “License Fee”.
This cost ranges from 15% to 30% of the product’s list price. It is very important to distinguish between contract price and list price. The first, usually, is less than the second and arises from a price negotiation between buyer and seller. It is very difficult for the selling company to negotiate the concept on which the annual maintenance charge is applied. In almost all cases the Fee is calculated on the list price.
For the client, the consideration is very wide, although the services mostly included are:
- Right to updates or new versions of the product.
- Extension of the warranty period.
- Re-installation insurance against theft, catastrophes or problems in technological supports.
Usually, the selling company requires the payment of the Annual Fee or Charge to offer any other service on the application because if the clients do not update the product, from a certain moment, it becomes very difficult for the vendor to offer support on the software version. older. It is common to observe support commitments in contracts for a certain number of years (2 or 3 years old) or up to a certain version (N-3) with N being the current version.
A separate chapter deserves the guarantee. Like any product (for example automobiles or electrical appliances), all ERP’s include a specific warranty period that is given for a number of months. From what moment does the warranty period begin to run? When does it expire? What does it cover? We invite you to download the document “ Application software warranty ”
This item is related to the problems that arise in the application due to errors of use (for example erroneous loading of transactions with fiscal effect), registration problems related to the infrastructure (for example, error in the recording in the database, problems interruption in the printing of an invoice or others) or simple queries about how to perform certain operations with the system.
This point is related to small changes in the business rules that an organization usually requires. For example modifications in printing formats, in transaction authorizations, security levels or roles, and others.
In general, evolutionary maintenance involves an estimated number of hours covered. In this way, the provider can anticipate the workload that it can handle on a monthly basis.
Bear in mind that, unlike inputs to produce, man-hours are not cumulative: they are consumed or lost.
Within this point, the maintenance of the application database is fundamentally considered. Usually the ERP vendor does not perform this task unless it specifically includes it.
It is important to note that an Oracle, Microsoft SQL, MySQL, DB2 or Postgre database engine, to name the most popular, are software products. Therefore they require maintenance. This includes both backup copies, details of audit data, review of error messages, maintenance of load balancing and others.
This task is usually entrusted to specialists with exclusive dedication to that task and skill certifications for the same. In other words, they are highly qualified and trained personnel whose cost is higher than that of other resources.
Some providers, usually the smallest, have exclusive rights in all application maintenance tasks. Others, often the largest, only maintain exclusivity in the collection of the annual fee and last line support, leaving the evolutionary maintenance management to free choice, which, generally, is the one that may require the greatest number of hours. This allows better options when buying the associated products or services since there is no monopoly of the application.
Changes to new versions
As previously mentioned, with the payment of the Annual Fee, the supplier delivers an update or a new version of the product with a certain frequency. For example, at least once a year. However, the installation of the updated version is not a trivial matter and it is usually necessary to raise a project for its execution. Depending on the type of product and the specific case of the implementation, the task can be executed in hours, weeks or months. Ultimately, this translates into time and money (cost).
In the case of complex implementations, with a lot of development made to measure, the task is complicated in an important way since the necessary tests must be carried out to validate that the customizations (customizations) are compatible with the new version.