Four factors that shape the cost of ERP

by Donald Burleson

You don’t have to be an expert to know that enterprise resource planning (ERP) is one of the most costly technology initiatives that an organization can implement. While it is very difficult to provide global costing guidelines, there are some important considerations that can help you estimate your total expense for implementing ERP. Here is an overview of four cost factors associated with staffing during an ERP implementation. These factors will likely weigh into your decision about whether you should purchase a packaged ERP system from a vendor or if you should custom build an ERP solution in-house.

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Second article in a series

This is the second article in a series on ERP and the factors you should consider when building or buying an ERP system for your organization. The first installment discussed the differences in packaged vs. custom ERP software.

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Plan for human costs
The costs of installation, implementation, and data migration generally run about three to four times the original cost of the packaged ERP software. For example, if your software costs $2 million, you can expect to pay an additional $6 million to $8 million for consulting services to get the system into production. TechRepublic members shared general cost information in a recent survey. (See Figure A.)

Figure A

Consider remote consulting
If your organization is located in a major metropolitan area, you will likely have lower consulting costs. For example, an ERP project in South Dakota may cost double the rate of the same system developed in Los Angeles.

This factor is present because the rates are more stable and competitive in larger cities. Organizations located in smaller cities may have to pay their vendor for consulting services at a rate much higher than the market average. If your company is located in a smaller city or rural area, you may want to use off-site consulting and hire consultants who work from home.

Transition your IT staff
It’s interesting that a recent survey of TechRepublic members determined that end-user adoption of an ERP package was the greatest concern among IT professionals (see Figure B).

Figure B

Analysts confirm that training end users is a significant expense. In a recent report on SAP end-user training, Gartner suggests that, at a minimum, enterprises should allocate 17 percent of the total cost of an ERP project to training. Gartner research also found that companies that budget less than 13 percent of their costs for training are three times more likely to see their ERP projects run over time and over budget when compared with companies that spend 17 percent or more on training.

But end users aren’t the only staff members who should concern you. Staff turnover among developers is common in organizations that are implementing an ERP solution. If you choose to purchase a packaged ERP solution, be prepared for staff turnover. In many cases, programmers will be excited to learn a new technology, while others are reluctant to embrace change. On the average, IT managers can expect to lose up to 40 percent of their IT staff, primarily those programmers who are unwilling or unable to master the new software.

Avoid the illusions of false savings
Many managers choose to purchase a prewritten ERP solution under the assumption that because the software is prewritten, they can downsize their IT staff. In reality, prewritten packages require IT personnel to locate bugs and apply patches to the packaged software. There are seldom any real human savings associated with adopting a prewritten ERP package. In practice, your IT staff will remain about the same size, with your old programmers being replaced with application specialists.

Selecting an ERP system: Build or buy?

by Donald Burleson

Many business executives and IT managers rely on prepackaged enterprise resource planning (ERP) solutions for all aspects of their businesses from manufacturing to accounting. The philosophy behind many ERP systems is that a suite of software tools can quickly integrate all areas of business administration. Major vendors such as SAP, Oracle, and PeopleSoft offer integrated tools for the task.

While many businesses choose one of these off-the-shelf ERP solutions, there are advantages to building an ERP application in-house. Often, businesses prefer to have in-depth institutional knowledge of how these systems work and how they interface with the various business areas. Managers faced with evaluating any enterprise-wide IT system must make the build vs. buy decision early in the process. This article will give an overview of key issues IT managers face when considering an ERP solution.

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First of three parts

This is the first article in a series on factors to consider when selecting an ERP system for your organization. The second installment will discuss the "human costs" for packaged ERP software implementation, and the third will cover strategies for evaluating ERP systems.

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Ask these questions before deciding to build or buy
While it is typically faster to install a packaged ERP suite than it is to build one from scratch, the required time investment depends mainly on the level of customization your company needs and the amount of data you have to migrate. For many organizations, the considerations that influence the build-or-buy decision include the following questions:

• Is your company willing to change the way it does business to accommodate the software?
• Do you anticipate many changes as the business grows?
• Do business functions provide a competitive advantage?

Is your company willing to change the way it does business?
The argument for packaged solutions: For many managers, suggesting that their employees change the way that they work to accommodate a software package is a ludicrous idea. However, many large companies are changing their business practices to be able to use ERP packages. Why would a company be willing to do this? Customization to prewritten ERP packages can be expensive, especially when software is upgraded. A company may also decide that there is little harm in changing business practices in routine areas that don’t provide a competitive advantage.
The argument for custom solutions: The custom solution is designed with your organization in mind so that it’s less likely your business processes will have to change to fit the ERP solution. The costs to customize vendor packages are high—an expense that might be avoided with a custom solution.

Do you anticipate many changes as the business grows?
Packaged: As business requirements evolve and as the business grows, more changes to the ERP package will be needed. Although both customized solutions and ERP packages are often very difficult to extend into new business functionalities, the packaged ERP suites excel in their ability to change and grow with the business, a flexibility advantage that is often touted by vendors.
Custom: Although a packaged ERP solution may be better at adapting to changing business requirements, you need to determine if this flexibility is worth the cost. Your organization may not make fundamental changes in the future. For example, basic business processes such as accounting finance and general ledger will seldom undergo radical changes. Therefore your organization may discover that a custom solution is adequate.

Which business functions provide a competitive advantage?
Packaged: If your organization does not have a clear competitive advantage from your ordinary business systems, an off-the-shelf solution can offer the greatest benefit because a packaged solution can be used right out of the box and requires very little IT overhead.
Custom: Are there features within your ERP application suite that may give you an edge over your competition? For example, if your company’s order processing ability gives you a competitive edge over the other vendors, it would be foolish to install an off-the-shelf order processing solution.

In cases where legitimate competitive advantages exist within the main business functions, it can be suicide to customize off-the-shelf ERP packages to maintain business methods. The cost of upgrades of these systems can often reach tens of millions of dollars when the application code has been customized.

Making the choice
If you build your own ERP solution, you benefit from customization, but that advantage comes at the expense of high development and maintenance costs. Packaged solutions are fully supported, but they may not always be an exact fit for your organization. To make the best choice, weigh the top considerations of your business against the advantages of each type of system.