how to calculate ERP implementation cost

How much does ERP implementation cost?

EasyERP Team 18/08/2016

As a part of our upcoming Ultimate ERP Cost Guide, we revisit our article from a year ago. The goal here is to present the actual and relevant facts to you, our blog readers. As technology evolves, the market expands and more new options emerge, so does the topic of ERP implementation cost. Let’s catch up on several critical matters hitherto.

Update: August 2016

Most companies sooner or later come to the conclusion, that they have to be up-to-speed with the requirements of present-day business realia. One of key issues to this is using the recent technological solutions that allow to boost up productivity. With newest types of software you can aim for higher efficiency in all business areas: product management, accounting, HR, customer relationship management, etc. One of them is enterprise resource management (ERP) system.

But the second question that arises – how much does ERP implementation cost? And this question is extremely tricky. The cost of ERP systems deployment depends on many factors. Here are at least a few of them for you to understand real complexity of the issue:

  • the size of the company
    • the number of users
    • the number of departments
    • quantity of locations
  • the type of solution
    • more specialized and customized, thus more expensive
    • less expensive and less flexible and specialized
  • the needed resources
    • external consulting
    • time spent by employees
    • tasks tracking, etc.
  • the level of customization.
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This list may be continued and expanded, however, these are the main factors. So just to give you the general image, here is the estimated cost of ERP system deployment based on company size and market range.

 

Type of enterprise Cost
Very Small Business $ 5 000 – $ 50 000
Small – Medium Business $ 50 000 – $ 500 000
Medium – Large Business $ 500 000 – $ 5 million

 

Well, that may be not that easy and clear-cut. The most popular search result by Google suggests a typical ERP installation for a mid-sized enterprise will range from $150,000 to $750,000 (Jan 2015, Clients First). That large range in ERP cost is due to the numerous above mentioned factors to this type of business software – the extent of use, training, customization, maintenance, upgrades etc. Like every living individual, every business environment or entity is unique. The price of each ERP project too, respectively.

No one can determine the whole final price for ERP implementation precisely. Again, we mean precisely. Any vendor can tell you their pricing policy and possible additional costs. You can predict your budget based on your infrastructure, staff and software requirements. The point is that you’ll know the total cost only when the project is complete. The common rule is: the bigger the company, the bigger the number of users, the higher the cost will go.

Let’s take the company with 100 employees that decided to go with SAP. One time fee of $ 2,975 per user already means $297,500. Add up annual maintenance fee (18% = $ 53,550), installation and configuration costs (with $195 hourly rate taking around $10,000 or more) and you have $361,050. Then add customization services and training (say $100,000 each), additional functionality a company might need, and you have the cost exceeding $500,000. The good news is that there are other options on the market.   

Of course, you may choose one of two options. To buy on-premise solution taking into account all possible options (initial purchase or annual software enhancement). Or to use ERP as SaaS and contribute monthly fees. Though, this choice is only up to you.

Whatever the estimation of ERP cost, the answer is always: it depends.Click To Tweet

Also, it’s useful to know that the price of the software itself is the lesser part of the cost. Most of the ERP cost will be spent on employees, external consultants and so on. Generally, the total ERP cost distribution looks like this: 15-30% go for the software itself, 5-10% go for database and system management, 10-20% go for the infrastructure. And the biggest part of expenses are human resources: from 40 to 60%.

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Factors contributing to ERP cost

But let’s take a closer view on the points, that affect the direct cost of any ERP system. First of them are type of a company and number of system’s users. It’s obvious that no two companies are same  and, correspondingly, each has its range of requirements to the ERP. In general, mid-size manufacturing entity will require more complex system than service-type company. To choose the best solution you have to make the detailed and deep requirements analysis. Even the software providers won’t provide you the precise price until you’ve done it.

ERP implementation cost is influenced by many factors. However, most implementation costs are calculated based on a ratio of software to service. Though a lot of other issues may influence it: company size and industry, implementation scope and complexity, number of third-party integration, etc. The most common integration ratios for the companies is 1 to 1,5 or 1 to 2,5.

The number of third-party services is another thing to influence the ERP implementation cost. Usually they are priced 30-35% of the system’s cost. What are third-party services for? Plenty of them are tailored to enhance experience of working with the ERP system, as well as to suit the needs of the certain industry.

Actually, this is an alternative route to spend less. As soon as ERP customers realized they can opt out of vendor maintenance, the market got filled with “third-party support” services. Many companies choose to do it themselves or outsource the task. And most of software experts say that is a sound option to optimize costs. In addition, those third-party ERP support providers are doing the job better, with support being more responsive in fact. Gartner has a great webinar on alternative ERP maintenance option and how to prepare for it, check it here.

Setting up and customizing

Finally, as there are no or only few solutions to suit your needs out of the box, the customization will probably be required. Of course it includes the scope of work, such as development, testing, quality assurance, bug fixing and integration. Thus, the more time it needs and the more complexity is required, the more it will cost. This issue also influences the total cost directly.

Image: EasyERP

Beside all of that, there are other expenses you may face. For example, service costs (except for deployment, testing and training) for the future support have the average price of $ 132-175 in the mid-market.

Of course, software must have the hardware to be installed to. If your company is not equipped with it, take into account, that from $ 12,000 to $ 50,000 should be spent for this matter. Bear in mind, those are very rough numbers, but worth the consideration as well.

Additional factor impacting hugely the ERP implementation cost is licensing fees. What ERP software license means? ERP systems, like other enterprise application, are typically not bought, but licensed for use. The licensing may be for a company, a particular unit, or a number of users. A software license can be perpetual or temporary.  Perpetual ERP licensing means you pay for it once and can use the application forever. A maintenance agreement may be integral to such type of licensing to pay for technical support and updates. Usually maintenance is priced as a percentage out of the license. The second type is the licensing fee for a certain period of time, or a “term license” as also known. When the term ends, you must renew the license or discontinue the software use.

Image: EasyERP

The bottom line for the total ERP implementation cost and services cost for middle-sized company as a rule may vary between $ 100,000 and $ 450,000. Extra costs are to be directed for the hardware and infrastructure, and they are usually addressed separately. Of course this estimation assumes an on-premise implementation rather than subscription-based or hosted solution. Modern ERP systems market provides you with the great number of solution providing multiple levels functionality with different modules and features, available for different prices and using various technologies. Thus, you are free to choose the most suitable and affordable solution right for you.

Now, those 2 previous paragraphs are still relevant. The horror stories of ERP cost going super-bad expose budget overruns of 100 to 500% and exceeded estimates by millions, and you’ve probably heard even more. Considering that, the key is to treat ERP implementation carefully, with the help of professional consultants and to make well-informed good decisions at every stage.

Chatra