The implementation of a new ERP system has several involved costs.
The total cost of ownership – or TCO – has changed over the years as it has developed to include things like longer-term optimisation phases and account management. Understanding these changes and how they can affect your business costs is essential if you are considering implementing ERP software in the near future.
In this guide, we’ll be taking a closer look at the TCO of ERP software and what this means for business operations.
Quick Links
- What is ERP TCO?
- How has ERP TCO changed over the years?
- How to calculate ERP total cost of ownership
- Reasons to track TCO
What is ERP TCO?
Enterprise resource planning systems can help you plan and manage all your business activities in one unified system, enabling you to build a sustainable and scalable business. But, like most things, there are costs involved.
ERP costs go beyond implementation and training – it involves a medley of aspects. These include hardware and software acquisition, management and support, communications, end-user expenses and the opportunity cost of downtime, training, and other productivity losses.
These costs can be blanketed by ERP TCO, which refers to the lifecycle costs of owning an ERP system.
A business should look at the entire picture when considering ERP deployment, which includes TCO as a significant factor to take into account.
How has ERP TCO changed over the years?
Traditionally, the total cost of owning, implementing and running an ERP system would include the software, services, hardware, training, and consultancy. However, services would tend to drop off after a system went live.
TCO has now evolved to include a new optimisation phase which is key to boosting the long-term success of your ERP deployment. Post-go-live optimisation involves an additional 6-to-12-month period where your vendor works continuously with you to ensure everything works smoothly and you’re optimising all the features and functionality you have purchased. Most importantly, it helps ensure your business is meeting the goals intended with your move to new ERP software.
Ensuring your team feels comfortable and confident working with the new ERP software is essential if you want it to be successful. That’s why the recent addition of go-live optimisation services can help reduce the learning curve and allow you to achieve noticeable results sooner.
How to calculate ERP total cost of ownership
There are several things to consider when calculating the total cost of ownership of ERP software. Some are more obvious than others, so we’ll go through them below.
Software price
The software price includes the core ERP software platform. That means any bespoke developments, integration costs and infrastructure environment-related fees (cloud, hosted, server, etc.) are also included in the software costs.
This cost can vary greatly from one company to another and will depend on your company size, industry, number of users, features and functionality required, as well as the level of complexity involved in your deployment.
ICT (Information Communication Technology) and Hardware costs
New or upgraded hardware could be required to run and implement your new software. This could include new or additional PCs and server changes which come at a cost.
The cost is dependent on how much of a hardware upgrade you need. You will also need to consider costs such as back-up and recovery services, as well as security provisions.
Implementation costs
The cost of implementing your new ERP software will influence the TCO. These costs will include the setting up of your system, configuring, testing and training of business unit owners. It will also include data migration services and project management-related fees.
Ongoing operating costs
ERP costs don’t end once everything is up and running. Ongoing operational costs should be factored into the overall cost for at least the next eight to ten years of the business.
Ongoing costs cover services such as technical support, future upgrades, customisations, system add-ons (i.e., new modules), future bespoke developments or integrations, and consultancy.
Thankfully, today’s modern ERP solutions offer tools that give your system administrator or super users more power and autonomy to make continuous, incremental changes to your system as needs change, reducing this cost to some extent.
Internal costs
Internal expenses, which are often overlooked when considering an ERP software upgrade, also need to be accounted for. Some of the internal costs to consider include:
- Appointing a system administrator– You may need a dedicated resource that’s capable of managing and optimising the new ERP system on an ongoing basis.
- Implementation resources from your team– Embedding new processes, cleaning and migrating data and training can all come with additional internal costs to your business.
- Ongoing optimisation – As your business evolves, your system will require tweaks (beyond which your system administrator or super user can implement) to accommodate new working processes or changing business models.
- Training – New staff will need to be trained, but existing staff may also need top-up training to get to grips with new elements of the system during the lifecycle of the solution. Some vendors offer free video training academies and knowledge base hubs that are definitely worth investigating if you’re looking to keep training costs to a minimum.
- Contingency plans – There should always be a contingency plan in place if something goes wrong with the system, or something hasn’t been thought of. Money should be placed into the budget for any unexpected issues that may arise, e.g a key process, not initially identified at your process review meeting, may need additional consultancy time to ensure it is implemented by go-live.
These expenses shouldn’t be forgotten in TCO – even if the money isn’t used.
Reasons to track TCO
Tracking the total cost of ownership will not only help you keep on top of your business spending, but will also show your business what you’re getting for your money.
Implementing and then maintaining a new ERP system can be a costly addition to your yearly budget, so tracking it can show you whether the benefits you yield are offsetting these costs.
Here are some of the main benefits of tracking TCO:
- Discover the overall scope of the ERP deployment in greater detail, so you can better understand the resources, time and work required.
- More effectively forecast, and subsequently, measure the projected ROI of the software, which may help to secure buy-in from senior stakeholders.
- Attain an estimated implementation cost to support planning and resource allocation.
- Track all costs associated with ERP deployment, including hardware, licensing, professional services, and any other expenses related to internal support.
We know your decision to invest in ERP software won’t be taken lightly. But we hope our guide to ERP TCO, will help you plan and budget for any future ERP software upgrade you may wish to undertake.
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