The hidden cost of an ERP system can be daunting given the many variables of pricing included. This article provides an in-depth review as well as learned gotchas from helping clients navigate ERP systems negotiations and operations. The key takeaway is to know what you need and to be savvy about how to reach out to a vendor when negotiating a contract.
Walking Unscathed Through the Minefield of an ERP Project
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Mistakes That Drive Up ERP Cost
In a previous article, the costs of owning enterprise resource planning (ERP) systems were introduced, presenting a cost-benefit analysis of various types of ERP systems including on-premise ERPs and cloud-based ERPs. Once you know the basics of ERP ownership, it is important to dive into the hidden costs of ERP systems to find the total cost of ownership and to see whether ERPs are right for your business.
There are several mistakes that a company can make that will drastically inflate the amount of money they plan on spending to the extent that they may not have been ready for. Incurred costs are not rare when signing onto an ERP contract, and can lead to unwanted over-budgeting. Thankfully, most of them can be avoided if you are aware of potential pitfalls before engaging with ERP vendors.
Not Selecting Enough Modules
The cost of each ERP module you select brings the price you have to pay for the whole ERP system up by quite a bit. It is tempting to cut corners when packaging your ERP system. While you may save money initially, this practice is ineffective because reimplementing new modules into an existing ERP system will cost more than implementing the module at the establishment of the ERP system from the very beginning. Especially with on-premise ERPs, changes to your ERP system could potentially render previous customizations buggy or even obsolete. Those issues will cause your company to spend much more than you had planned to on IT people, consultants, and overtime pay.
Selecting Too Many Modules
On the other hand, selecting too many modules can also drive up ERP costs. With so many modules on the ERP market to choose from, it is easy to be overwhelmed. Every module seems to serve an important purpose, and while that may be true, most small to medium businesses do not require every single module. Knowing what your company needs before packaging your ERP system will save hundreds to thousands per month. One way to ensure that you only have the modules you need is to seek consultation before you sign the ERP vendors contract and we can help you! Contact us using the button below to seek consultation.
Poor Planning During Customization of Your ERP
Issues with customization mainly arise from on-premise ERPs given the scope of which you can customize on-premise ERPs. However, this point goes for both types of ERPs. When customizing your ERP to suit your company’s needs, it is critical to preplan exactly what customizations you want if you want to save money in the long run. Just like inserting extra modules, adding customization options to existing ERP systems will incur extra unplanned implementation, IT, and training costs (Source). Planning for the customizations you want to add to your ERP will greatly reduce these expenses.
Underestimating Costs
Since ERPs are packaged in bundles, there are so many numbers to add together. Moreover, most ERP vendors and consulting companies’ prices are hard to find. If you wanted to look for pricing, most are ballpark estimates of the actual price tag. Having an accurate estimate (Check out our ERP price range chart for more information) will save you capital, and prevent any scares that can be caused due to the much higher price in comparison to what was estimated. On the other hand, preventing the overestimation of costs will free up capital for you to use in your business.
Being Unaware of Hidden Costs
One of the biggest dangers to handling ERP systems is being unaware of the hidden costs behind ERP ownership. Just like underestimating costs, being unaware that they exist will blow your budget. We have listed the hidden costs of ERPs below so that you can be aware of them when they come your way.
Hidden Costs To Be Aware Of
Labour Costs
Costs for software developers and consultants for implementation of your ERP are probably on your mind, but how much exactly do they cost? Usually, labour costs will fluctuate depending on which ERP type you choose to have, and how big your company is. The bigger your company, the longer the implementation, and the higher the cost. Another factor that will affect the labour cost is how experienced the team implementing your ERP is. More experienced ERP consultants will be able to complete implementation much faster, and let you save money and time. On average, ERP consultants charge between $100 – $200 per hour. Make sure you budget enough to account for this bill. If you plan on owning an on-premise ERP, IT salaries and temporary support staff may also bring up the total cost of ownership.
Integration & Customization
If the ERP system fails to satisfy all of the needs you want from its deployment, you may potentially seek out customization of your ERP. ERP vendors will usually tell you that the customization you want will be possible and quickly integrated into your system, but most of the time it will not be a quick process. Custom engineering solutions will take up a lot of time, and will lead to extra labour costs that you did not plan for.
Hardware Cost
No matter which type of ERP system you choose to own, both will require individual hardware to set up. Whether you’re using a cloud-based ERP and have to upgrade existing network infrastructure or an on-premise ERP and have to upgrade your server to be able to handle the ERP, hardware is going to cost a substantial amount. Especially if you have not already started to invest in technology for your company, new hardware to accommodate the ERP system may be expensive. Make sure you ask your vendor or consultant and account for hardware acquisition/upgrade costs related to the ERP type you plan to own.
Training Costs
Part of the implementation process for ERPs is training your staff to know how to use the new system. Depending on the size of your team, training can take anywhere from 3 weeks to a year. In addition to that, new staff will have to be trained up to standard and that will cost you as well. An example of which poor training had led to the death of a franchise is Target Canada whose failures lay in implementing SAP Business One with the entry-level employees of Canadian branches of Target stores. When expanding to Canada, Target had failed to consider the sheer amount of employees who wouldn’t actually have experience with quality checking the data that was inputted into SAP given that the Canadian metric and the American imperial systems, and their related standards are much different. Failure to enter the international market as well as impossible deadlines and a lack of training caused Target’s Canadian market to collapse after just two years of operation.
Maintenance Costs
ERP systems will need to undergo quality checks, security updates, and vigorous testing from time to time to ensure that it is working how you want it to, and to protect against data breaches. Over time, the quality of the ERP will decrease much like other software, so maintaining the software by constantly updating it will cost money. Every few years or so, ERP companies will push a major update out, so the software license will also need to be upgraded (although some companies choose to keep using old software). Maintenance is much easier with cloud-based ERPs since you don’t need to upgrade your systems every time a major update comes out, but it is a significant expense with on-premise ERPs.
Support Costs
During the implementation phase, something will probably not function as it is meant to and inevitably, support will be called. Sometimes, your team will also give you feedback on things they may want to tweak about the ERP. Whether it is quality of life changes, new customization ideas, reconfiguring settings, etc., your first order of business is probably to talk to support. ERP vendor support is not free, and you will be billed for support calls. Though minimal in comparison to the other hidden costs, it is worth mentioning since it can be an unexpected fee.
Other Ongoing Costs
Other hidden costs are less evident when considering ERP systems for your company. An example of one such ongoing cost is the revenue that could potentially be lost during downtime. Despite being a very powerful software, ERPs are still subject to downtime. One way to neutralize this is to have a backup option during downtime to maintain operational stability. Usually, downtime does not happen often, but the chance that it could happen is enough to be mentioned here and could be a risk you may need to assess down the road.
Mid-Year License Changes
Sometimes, ERP vendors have a clause in the contract that will increase the cost of ownership for multiple reasons. One of such is if your company plans on purchasing extra licenses for new employees. Being aware of the fine print in the contract and planning in advance will allow you to avoid this hidden cost.
Contract Price Hikes
As a common practice, most ERP vendors will increase their prices to match global inflation rates. Standard increases per year average around 3-4%, and being unprepared for this increase could lead to some unpleasant surprises. Something a company can do to save money in this area is to negotiate a price lock or a price increase that goes up with yearly inflation. Be careful with the terms of your contract because a poor contract could potentially create a vendor lock-in situation where migrating would cost too much, so you would be stuck with that particular vendor.
Acquisition
Being acquired is sometimes part of how a business runs. Once a company is acquired, usually, its software is not maintained as well. Since ERP is a software system, if it isn’t supported or maintained as often, the returns for having an ERP are diminished. Before considering an ERP, asking if the company is in talks for being acquired
Regular Season Pricing vs End-of-Quarter Pricing
Many ERP companies are publicly traded and this may affect the price that an ERP vendor tries to sell their product to you. Publicly traded companies tend to report profits to maintain the interests of their shareholders and stakeholders near the end of the quarter. Since they need to prove that their business is profitable and worth the continual support of their shareholders, they may raise the price of the ERP by a set amount to ensure they meet their goal. By association, that means that when you are shopping for an ERP system, you should consider when you are looking since an end-of-quarter search may cost you much more than if you were looking during the regular season.
Trusted ERP Advisory
Mindfield Consulting has helped businesses lead their industries by creating powerful resource planning technologies and transfer from spreadsheets and paper documents to allow our clients to redefine a global business process to stay informed, reduce risk, and increase the delivery velocity of key products. We help organizations find the right mix of packaged and custom software from planning service delivery, to remote locations, to global trading systems for precious materials and resources. Mindfield Consulting has over two decades of experience delivering technology that meets every mission. Our clients win when they are empowered with the right technology and the right people for over 19 years across Canada. Mindfield specializes in custom software development, e-learning for corporate training, and Jira expert consulting.
