How much does ERP costs?

The shift to cloud consumption has generated an increasingly complex family of software and service costs associated to standing up an ERP system. With the ever-popular cloud delivery models comes the expectation for rapid implementations; demanding near-term business value and immediate return on investment (ROI).  For this reason, even the simplest of user types and module selections cannot circumvent the entire cost of the project. In addition to maintaining a simple cloud pricing structure, the selection process alone must align with the company’s internal resources and maintain an eye for tomorrow’s vision. We break down the costing in a way that also organizes a selection process for our future customers to drive their own independent, well-educated decision

Step One:  Pick the Right Software Vendor

There are several ERP platforms for small and medium sized business. Some of them scale to meet the needs of large enterprise; differentiating only in pricing alone. And some solutions are provided as a Platform as a Service (PaaS), which is actually an amalgam of vendors organized to support an industry-specific workflow.  PaaS can be trickier to evaluate because of the multiple vendors involved but it can also offer compelling solutions for niche operational requirements.

Regardless of all the glossy product demonstrations provided by each vendor, the future of the solution lies in its ability to maintain the code and cloud infrastructure in the upcoming ten- and twenty-year’s time. We recommend answering a short list of high-level questions early in the valuation process.

1. How many developers currently support the product(s) that represent the solution?

2. How many customers are using the solution currently?  By industry, region, globally? 

3. Does the solution directly or indirectly support my business?  Is it specific to a niche? (i.e. micro-industry), or is it fundamentally a more general solution that is intended for customization to meet the unique requirements?

4. How much dedicated compute does the cloud platform provide? Multi-tenant and single-tenant clouds are priced in a similar format but are not the same.  Most growing businesses will want to control the ability to size up their cloud servers as needed, which is only offered through single tenancy.

5. Is the ERP package GAAP compliant? And is that feature important to you?

6. If any of these requirements are deal breakers, then an elimination can be quickly made. To quantify this part of the evaluation we’ve comprised an overall scoring system based on a weighted average method of calculation.  See Avaniko’s ERP Evaluation Tool.

Step Two:  Determine User Counts by way of elimination

Start by naming every user who might contribute or consume data across your business processes.  Then name your business partners who interact with those employees on a daily or weekly basis.  This early stage exercise is intended to miss nobody because the process of elimination will inevitably occur.  While removing ancillary business processes or data requirements to meet your budget, it’s critical to know what every possible process is so as to prioritize and delay portions of the implementations into phases. The process of determining a go-live scope and subsequent iterations is a great way to manage your budget, timeline and overall expectations.

Next we prioritize the users across three to five categories of importance.  I suggest starting with three fundamental workflows and build additional ones according to your business processes.  First identify your GLAPAR (GL, AP and AR) requirements, most always within the finance team. The next two fundamental workflows are specific to how the business makes and spends money.  We call these processes ‘Order to Cash’ and ‘Procure to Pay’. Then you’ll determine those industry-specific requirements that are unique to your business. While these are critical features highlighted in product demonstrations, they need to be defined in a way that they’re maintaining the system’s integrity and supporting financial requirements.  When decisions must be made between integrating to other systems and exploring ERP workflows the data is also defined on a more granular basis.  If your end-user list was as extensive as I’ve encouraged, then all the processes will align with end user roles throughout the solution.

Once final user counts are assessed, the cost to grow the business should also be realized and budgeted for. In addition to the per/user license costs that vendors publish; the cloud platform is priced separately.  The reason for this decoupled pricing schema is based on an estimation of server or compute to run the overall system. Public cloud platforms (such as browser-based applications) will find a way to charge more for the platform when certain thresholds are reached (usually user counts, sometimes modules). These vendors may also include additional functionality when the platform is upsized (by way of more users and/or a la carte modules). Make sure to understand these thresholds in a way that recognizes a budget for growth and to avoid unpleasant surprises a few years later. While this may seem confusing to the untrained buyer, it can be the most transparent way to purchase a cloud platform and avoids unforeseen performance issues.  More about this is described later in this article.

Step Three:  Evaluate the Implementation Service

Quality comes from good planning.  If quality is your priority, then the implementation should cost at least three times that of the first year’s software expenditure (i.e. $20,000 end-user licenses/software + $10,000 cloud platform + $60,000 professional services).  Following the user counts and business process exercise, ERP buyers will have gained an education in what to pay for in the near term. Later phases should have an eye for enhancements and organic business growth. 

What is it that makes a standard cloud platform work harder than the user count anticipates?  It’s the dynamics of non-user or machine-driven processes that require additional resources and hadn’t been accounted for. Integrations to support web orders, EDI and interactive vendor activity in the supply chain have significant value to your ERP solution however, they historically have fallen outside of the standard end-user counts. These processes warrant significant value so the fact that they affect the overall cost shouldn’t bar them from being implemented.  I would also point out that extending across the The Intelligent Enterprise is what make a Value Add Reseller (VAR) invaluable to your ERP vendor relationship. When your requirements are properly drawn up from an affective presales process, the project plan is supported by a detailed Statement of Work (SOW) which adequately budgets professional services costs.

What kind of ERP software implementation style is best for your organization?  The right service provider earns your trust during the sales process and integrates with the company’s culture and overall expectations of management. This means that either a waterfall, agile or combination delivery model will be used. Traditional waterfall methodology is good for a top down approach and lends itself to a limited budget while accomplishing a specific scope and go-live objectives. Conversely, some organizations prefer an agile approach that feeds upon multiple iterations of design and testing; lending a value to the creativity of defining a solution that solves a specific business problem in one or multiple ways.

Step Four:  Negotiating the Contract

During the first year’s contract consider the total expense of implementation services, software license and cloud platform. Other variables such as contract term, renewal pricing and payment terms impact budgets and precious cash flows.  For this reason, it’s imperative that you work with a service partner to develop a relationship that builds value and respect over time. Software licenses alone don’t achieve business goals but when software is properly implemented, then significant returns are realized for the business’s bottom line.


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