We’ve been around more than quarter of a century and we’ve seen thousands of companies struggle with technology seeking their next strategic business system. We’ve seen companies pick the right product and we’ve seen them make huge mistakes leaving them with a tangled mess, bad data, and crippling debt only to have to go through the process again. Replacing your business software isn’t easy. It can (and should) take many months to evaluate vendors and products and to eventually select a business system. And it’ll take you at least another couple months to implement the basic system which is where most companies stop and become complacent – never returning to setup the advanced features available to them in their application. It’s no wonder why most companies keep their business software for at least 10 years (about 12-15 years for midmarket companies).
In her July 18, 2017 story, “The Real Cost of Aging IT Systems” on Excella.com, Stephanie Vineyard writes, “Data creation is exploding, but legacy systems remain ubiquitous and continue to power the business world. It is estimated that close to $3 trillion in daily commerce continues to run through 60-plus year old COBOL systems. Just two years ago, it was reported that the banking and insurance industries spend close to 75% of IT budgets maintaining workhorse systems, such as these COBOL systems.” This is just one of hundreds of accounts showing how reliant businesses are on technology and how difficult it can be to move to new platforms.
The big question is this: When is the right time to switch software and what are the tell-tale signs that the time is now and not later? This white paper is based on our years of experience working with thousands of companies that were faced with this same question. Our goal is to help you and your team to understand what to look for and to put some hard data to the inefficiencies caused by staying with the wrong software for too long.
Total Cost of Ownership of Business Software
First, we must understand the cost of replacing a complex, midmarket This can be difficult to standardize as different vendors have so many variations of their pricing models based on user counts, transactions, types of users, and deployment method.
Business software vendors traditionally sold their software as a perpetual license meaning that the company purchased it as they would any other business asset and wholly owned the software. They were then charged an annual maintenance and support fee to provide access to new versions, bug fixes, and support. Maintenance and support contracts were typically 15% to 30% of the cost of the perpetual software license.
Most accounting and ERP software is now sold as a subscription which may be referred to as software as a service (SaaS). In a SaaS model, most vendors charge a flat fee for a subscription to the software for various configurations or modules. The maintenance and support is rolled into the subscription price. Few vendors offer monthly subscriptions with the majority offering annual subscriptions by default and discounts for payment up-front for multi-year contracts.
Note that the cost of any business system will depend greatly on the number of modules you need. All estimates provided below are for an accounting-only system with typical modules such as General Ledger, Accounts Payable, Accounts Receivable, Bank Reconciliation, and Purchase Order. You can expect to double all cost estimates below if you are a distributor and require sales orders, inventory management, and warehouse or barcoding modules or if you’re a professional service firm and require project accounting and time entry. Triple the cost estimates below if you’re a manufacturer and need bills of materials or recipes/formulas, work orders, material requirement planning, scheduling, and other manufacturing modules. Again, these multiples apply across all cost elements – the license fees, maintenance and support, and the required professional services.
Purchased Perpetual Licenses
Companies outgrowing entry-level accounting systems like Intuit QuickBook should expect to spend an average of about $1,500 per concurrent user (the number of users in the software at any given point in time) for a purchased perpetual license where you own the software. Annual maintenance and support contracts for perpetual licenses are typically 20% of the list price. And the cost for a consultant to install, configure, implement, and train you how to use the software is roughly the same as your investment in the license itself. Do not make the mistake of trying to implement the software yourself. These systems are too complex and you will cost yourself more in the end trying to self-implement.
Concurrent Users Perpetual License Cost (One-Time Cost) Maintenance & Support (Annual Cost) Professional Services (One Time Cost) Total Cost (Initial Investment)
Subscription SaaS Licenses
The cost for the base accounting system in an annual subscription model is typically around $800 per concurrent user per year ($65 to $70 per month). Maintenance and support is most often included in the subscription and the professional services to configure and train you on the software can be slightly lower (by about 10%) if the application is hosted since this eliminates some of the installation that is inherent with premise-based applications typically sold under perpetual license models. The table below provides an estimate for subscriptions for a midmarket accounting-only system. Keep in mind to double the estimates if you are a distributor or professional service firm and triple the estimates if you are a manufacturer.
Concurrent Users Subscription License (Annual Cost) Maintenance & Support (Annual Cost) Professional Services (One Time Cost) Total Cost (Initial Investment)
The total cost of ownership estimates previously provided are estimates only. You can expect vendors to vary by as much as 10% to 50% below or above these estimates but be wary of vendors or products that are too far off from each other in respect to cost. It’s likely that the product that costs less has less functionality and that may be ok for you but you need to understand what your missing that the more expensive application has to offer.
There are other costs that you will undoubtedly incur by switching – you may need to upgrade servers, purchase additional licenses for virtualization, and there is of course the cost of the database license and operation system licensing for installed applications (perpetual licenses).
You will also likely lose some productivity as you spend time on the new system setup and training. Expect to spend at least as much time as your consultant on the implementation project. Consider that you will need to rethink your chart of accounts and someone will have to review the data to ensure that you aren’t simply moving bad data from the old system to the new one. Expect to spend at least 40 hours at a bare minimum for a very small accounting implementation. Your consultant should provide you with a project plan including the total hours needed for the implementation. Use than number and multiply it by an hourly rate for your average employee cost to understand the softer costs associated with productivity loss for the project.
Now that you have a fundamental understanding of the costs associated with purchasing, maintaining, and implementing a new system we can move on to discuss each of the 15 tell-tale signs that you may be ready to make the switch to a new system.