how to calculate ERP implementation cost

How much does ERP implementation cost?

EasyERP Team 18/08/2016

With goal of presenting relevant facts and ERP software related trends to our readers, we revisit our article from over a year ago. Enterprise software systems are a cornerstone for today’s business workflow, though technology and markets are evolving constantly. And we need to look at ERP implementation from a fresh angle.

Update: October 2017

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 modern software solutions that boost productivity. Various kinds of business apps can improve areas like product management, accounting, HR, customer relationship management, etc.

One of them is enterprise resource management (ERP) system. But the second question that arises instantly – how much does ERP implementation cost? And this question is extremely tricky. So let’s see what goes into this process, what are the stages, tips and costs involved.

What is ERP implementation

ERP software are integrated systems/programs managing the internal and external resources of an organization. A standard ERP package will commonly include: finances, accounting, resources distribution, human resources. More advanced systems will also have customer relationship management (CRM), sales management, supply chain, purchasing, warehouse management.

ERP implementation is a lengthy process that takes time and resourced. But it pays off in the following years. This process includes selecting a proper ERP for the organization, planning, deployment and maintenance. Depending on complexity, there are 3 types of implementing ERP system:

  • Rapid – installing an one-solution program for a single-entity business, when no additional services or adjustments are required;
  • Standard – for single or multiple entity businesses, when some customization is required;
  • Advanced – with various locations, multiple entities, languages or currencies, add-ons, etc.

Benefits of ERP system to business

It’s all about business productivity, always a rule for success. A good ERP application brings real-time access to an integrated unified database of processes for everyone in a company. In other words, it makes work much much easier for business organizations. All is pretty straightforward with an ERP.

To elaborate, we’ve collected 10 main benefits of ERP implementation:

  1. Efficiency – a real #1 winning feature, reducing manual and repetitive tasks.
  2. Cost-saving – no less important, with accurate data reducing operating costs and preventing delays/disruptions.
  3. Security – confidentiality and safe data with options to restrict access to various layers of information.
  4. Customer service – better and quicker interactions with clients, customer database, consistent and full information, transaction history, etc.
  5. Mobility – easy access to a centralized program from anywhere.
  6. Reporting – multiple types of business reports, options to customize reports, better visualization of complex data.
  7. Forecasting – based on accurate data and transactions from your very own business operations.
  8. Flexibility & scalability – various configurations are available, tailoring all the elements and modules as you wish, as well as adding more over time.
  9. Automation – saving time and costs by automating redundant tasks.
  10. Competitiveness – with all those advantages put together in a proper way, your company will gain an edge over other market players.

Real-life example

A great example of efficient ERP implementation is by Nestle. With improvements that application has brought, in particular to supply chain management and demand forecasting, the company was able to earn additional $325 million in the next year. Moreover, Nestle reached much better productivity as one big business, as 29 different brands merged into a single real-time database.

ERP implementation planning

Within the lasting quest to deploy an ERP system, the first stage is discovery and planning. It simply cannot be omitted due to many intricacies and business requirements and specifications. This is strategic, this is how you select the right software and are going to put it to work. Once business requirements are gathered, and an ERP system selected, it is time for ERP implementation plan. It should consist of:

  • Business case abstract
  • True cost of ownership (TCO) defined
  • Configuration requirements
  • Project management
  • Business process requirements
  • Implementation strategy
  • Organizational management (roles and responsibilities)
  • Stages defined
  • Timeline and deadlines
  • Areas of inconsistent system capabilities
  • Data migration strategy
  • Resource requirements

4 top strategies for ERP implementation

There are different strategies of ERP implementation, and choosing the right one is crucial. Collectively, these are 4 groups of strategies:

  • Big bang – a new system goes live instantly and all users switch to it;
  • Phased rollout – transition happens in phases, users move step-by-step;
  • Agile – also happens in phases, but under continuous design, testing and deployment of elements until moving to another one;
  • Parallel – both new and old system are functioning at the same time, while users gradually switch to a new ERP.

#1 Big bang strategy is also known under “Sink or swim” motto, as it is quite risky. In this approach ERP implementation is carried out in a single moment. All modules of a new system are installed at the same time and the legacy (older) system is switched off. It is the point of no return, in some sense. The danger is that if one element fails, it puts at risk the other components of the system and the whole business activity.

On the other hand, this ERP implementation strategy saves time and money, does not require any temporary interfaces. As a rule, “Bing bang” is suitable for smaller enterprises, or time is crucial.

Image: EasyERP

#2 Phased rollout suggests the shift to a new ERP system is made in a scheduled sequence of steps over a period of time. This approach gives time to find solutions if anything goes wrong and also to temporarily return to the old system for the period while the problem is solved. It also offers a possibility to begin with modules that are most vital. If the organization has many sites, the phased approach offers opportunity to choose a pilot site to implement an ERP. Training happens stepwise – employees acquire and accumulate experience and skills. This also improves the acceptance rate. Phased approach makes it easier for IT department to fix issues gradually.

There are three different ways to achieve phased implementation:

  • by module – usually, first to go are modules used in everyday operations;
  • by business unit – starting from one site/department, and continuing one unit at a time;
  • geography – based on regional/city/etc. units, one at a time.
Image: EasyERP

#3 Agile deployment is great for difficult to manage long-term projects. This strategy divides a project into short periods called sprints. Each sprint has a phase of testing and adjustments, allowing to tackle potential issues and to resolve them right upfront. It gives possibility to quickly adapt design and implementation to business changes – the possibility the other approaches do not provide. The first step of agile strategy is to collect all necessary information and to prepare the project. Then sprints are run. Agile is flexible enough in terms of market demands and costs less, though needs temporary interfaces and tends to take more time.

Image: EasyERP

#4 Parallel is a less riskier strategy as it suggests implementing a new system while still running a legacy system. Employees can learn to use a new system and perform their regular activities with the old one. When a new ERP is well in place, the old system is switched off. Weighing in pros and cons here, we should note that parallel approach involves higher costs, longer implementation period and more effort (users have to enter data into both systems).

Steps of ERP implementation

Choosing an ERP system that meets your specific requirements will enable a smoother ERP implementation. If that software suits your industry and niche, you won’t have to custom design and adapt an application. One of top reasons ERP implementation often fails is because of inconsistency with business requirements. However, purchasing an ERP is only half the deal. In any ERP implementation process, there are certain mandatory stages, want it or not.

  1. ERP selection – write down critical features, analyze, study and compare, negotiate.
  2. Management changes – as one has to re-orient and persuade employees to work within totally new environment.
  3. Data preparation and migration – reviewing how compatible your data are with a new ERP, decide on what could (and could not) be eliminated, data transition.
  4. ERP deployment – installing, configuring and optimizing the system.
  5. Testing – checking if every aspect works properly, fixing errors.
  6. Customization – adjusting ERP’s critical elements in accordance with company’s workflow and business processes.
  7. User training – teach every employee working with the application how to use it efficiently.
  8. Launch and maintenance – ERP activation throughout all departments, post-launch ongoing support, maintenance, updates, etc.

How much does an ERP implementation cost

Finally, we have arrived at the main issue when deploying an ERP solution – the cost. 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 company (number of users, number of departments, number of locations, etc.)
  • the type of solution (industry-specific and customized, or general and flexible)
  • resources required (external consulting, user training, task tracking, etc.)
  • level of customization
Image: EasyERP

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
Small Business $ 5,000 – $ 50,000
Small – Medium Business $ 50,000 – $ 500,000
Medium Business – Enterprise $ 500,000 – $ 2 million

Again, that pricing range 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. 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.

Calculation example

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. Ok, $300,000, evidently.

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 $360,000.

Then add customization services and training (say $100,000 each), additional functionality a company might need, and you have the cost exceeding $500,000.

Also, it’s useful to know that the price of 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,
  • 40-60% on human resources.
Image: EasyERP

Factors contributing to ERP cost

  1. Type of a company and number of system’s users

It’s obvious that no two companies are same. In general, mid-size manufacturing entity will require more complex system than service-type company. To choose the best solution you have to conduct a deep requirements analysis. Even the software providers won’t provide you the precise price until you’ve done it.

  1. The number of third-party services

Expect about additional 30-35% to the ERP solution 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. In addition, those third-party ERP support providers are doing the job better, with support being more responsive in fact.

  1. Service and hardware costs

Ongoing system support costs $100-200 on average in mid-market. And of course, software must have the hardware to be installed onto. If your company is not equipped with it, take into account, that from $12,000 to $ 50,000 would be required.

  1. Licensing fees

What does ERP software license mean? ERP systems, like many enterprise applications, 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. A maintenance agreement may be integral to licensing – to pay for technical support and updates. Usually maintenance is priced as a percentage out of the license.

  1. Deployment type

Whether you choose a cloud-based installation or on-premise ERP implementation, each influences the cost in its own way. Most cloud ERP systems are sold on a subscription basis when you pay per user / per month, and rent the solution, so to say. Premise ERP systems usually carry one big upfront fee, making you the full owner.

ERP maintenance costs

In continuation of things driving the price of ERP installation, a lesser known fact is that the cost of maintaining an ERP often exceeds the cost of initial implementation. Yes, we are not mistaken. Businesses evolve, open new units and acquire new trading partners, or may outsource some work, etc. ERP system has to evolve along, surely.

The cost of ERP maintenance is typically 15% – 20% of the investment in an ERP solution. So, if we take our median $500,000 price, the annual support for it would be about $75,000. To minimize those costs, expert tips are the following:

  • Plan and implement your ERP better
  • Exclude unnecessary licenses
  • Reduce hardware updates with cloud solutions
  • Hire service provider and reduce your own IT management

How to measure success of ERP implementation

What ERP implementation metrics are out there? Would you accept just asking employees how many of them are really using the new ERP system? Let’s hope not. Though you should be asking whether converting to ERP went without business disruption and impacting customers. And some more specific and accurate metrics to measure the success of ERP implementation project are as follows:

  1. Measure a cycle time (time to deliver products to a customer from the moment of incoming invoice)
  2. Check system forecast accuracy (requires some time and data collection)
  3. Measure customer satisfaction
  4. Measure employee acceptance rates
  5. Estimate sales transaction times
  6. Check system downtimes (the lower number, the better)
  7. Measure strategic benefits (quick decision making, reports, cost-savings, etc.)

Bottom line

In conclusion to the issue of ERP implementation cost, we should say that the cost may vary:

  • between $100,000 and $500,000 for middle-sized companies

and

  • could exceed $1M or even $2M for enterprises 

Such estimation assumes on-premise implementation.