The security, scalability, and mobility delivered by modern enterprise resource planning (ERP) systems are well-known. What’s harder to know is the cost of ERP and it’s keeping companies on the fence about taking the leap.
It’s no secret that replacing business software is an investment, but have you considered the cost of maintaining an outdated legacy system? Can you afford the waste and manual workarounds that come as a result of remaining on that system? What you can’t afford is making an ill-informed decision that leaves you behind while your competition’s digital transformation is well underway.
So What Is the True ERP Cost?
“Out with the old, in with the new.” If only it were that simple. When replacing outdated legacy accounting software with ERP, there are many factors involved, including the software evaluation and vendor selection processes. The biggest concern always comes back to: how much does ERP cost?
As with most substantial technology upgrades, the cost of a new ERP system is a driving factor in the decision. It’s good to start by appreciating the actual value of ERP which by factoring in both Return on Investment (ROI) and Total Cost of Ownership (TCO).
Calculating ERP Total Cost of Ownership (TCO)
There are several items to consider when calculating the TCO of a new ERP, including the purchase price, implementation costs, operating costs, upfront costs (e.g. software license fees, hardware expenses, software configuration, IT workforce, total system installation), user training, and maintenance over a period of 5 to 10 years.
There are also hidden costs such as time, on-going labor expenses to implement the system, future system customizations, retraining, upgrades, and more. It’s easy to overlook, but since most businesses will experience them it’s important to be prepared with a project scope document.
Examples of hidden costs include: Additional personnel and time allocations are required to evaluate any new business software and the new procedures that ensue. It takes time for an established staff member to evaluate, propose, and organize an ERP project. While maintaining the course of normal duties, current employees need to reallocate time to train on the new system and implement new procedures.
Also, keep in mind that the annual maintenance expense for on-premises systems can amount to 18% of the current list price of the system each year. Added together, your company is basically purchasing the software again every five years.
Bringing us to the equally important side calculating the true cost of ERP – the savings and return on investment you’re able to realize by upgrading.
Calculating ERP ROI
The rationale behind investing in modern ERP software is to bring down operating costs and boost productivity. The savings and return on investment (ROI) that a new ERP system offers helps to compensate for the price tag.
ERP ROI is a process for computing the savings and the improved earning potential as a result of implementing a new ERP. While increased profitability, reduced operating costs, and reduced inventory levels are measurable, some ROI indicators can be challenging to quantify.
For example, how can you assign a number to teamwork, employee satisfaction, or even customer satisfaction to be able to factor them into the ROI computation? Nonetheless, there are standards that some industry experts have provided that can be used when estimating standard indicators.
Calculating True ERP Cost
By weighing both TCO and ROI, the true ERP system cost can be computed as ROI minus TCO over five years, as represented in this equation:
True ERP Cost = ERP ROI – ERP TCO
Estimating for the 5-year TCO and ROI is crucial to make an educated ERP system buying decision.There are calculators available to help you calculate the TCO, ROI and true ERP system cost. Some calculators allow you to make a comparative analysis of the options available in the market.
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