ERP Systems: Understanding Implementation Cost Factors

 

 

With the growing demand for digital transformation, businesses are hard-pressed to keep up. More organizations are adapting to this trend by relying on Enterprise Resource Planning (ERP) software to increase their efficiency and streamline processes and are allocating bigger budgets to implement the best ERP systems.

 

Understandably, you want the best ERP software product for your business, and having the best means your organization must be willing to invest. However, before you spend money on a platform, you need to understand what each enterprise resource planning system can offer and the expected expenses for the implementation of prospective ERP systems.

 

In this article, we provide insight into factors that can affect the cost of ERP implementation so you can prepare a more realistic budget and have the necessary data to help you acquire the best enterprise resource planning software.

 

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Content Index

 

• How much does ERP software cost?
• Factors that Influence the Cost of ERP Implementation
• Justifying Your ERP Implementation Budget
• Building a More Realistic ERP Implementation Budget

 

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How much does ERP software cost?

 

The cost of ERP systems implementation varies with each business as the expense is different for small, medium, and large enterprises. You need to consider your specific requirements to create a more suitable budget for your organization.

 

Reports show that smaller and mid-sized operations can expect to spend approximately $100,000 up to $1 million, while bigger companies usually have bigger costs that can reach tens of millions.

 

With such amounts invested into business software, it is no surprise that the projected revenue in the ERP market is expected to reach $125.02 billion by 2031.

 

While these figures may seem a lot, remember that ERP systems are typically one of the largest investments organizations have to make. Yet, choosing the right ERP software can lead to an immediate return on investment (ROI).

 

 

Factors that Influence the Cost of ERP Implementation

 

There are various ERP systems  available in today’s market, each offering different features, benefits, and implementation requirements. This means that you can find ERP software systems that are designed for specific types of industries, business functions, and needs. All these factors are important when you are considering the cost of ERP software, but there are additional considerations if you want to create a more realistic budget that aligns with your long-term objectives.

 

1. Software Licensing

 

The type of software licensing you purchase will determine the pricing plan you buy. Most vendors of off-the-shelf ERP systems provide subscription-based or perpetual software licenses. Choosing between the two requires careful consideration of the possible growth of your organization and an assessment of your current infrastructure.

 

A subscription-based ERP software license provides more scalability and flexibility and typically allows access from anywhere. You can pay a monthly or annual fee, which makes it a cheaper option for start-ups and smaller businesses. However, your software subscription may come with a vendor lock-in agreement which can make it more difficult for you to change providers in case you are unsatisfied with the current ERP product.

 

A perpetual ERP license typically asks for a one-time upfront fee that allows organizations to use the software indefinitely. This is usually preferred by larger companies that have sufficient infrastructure for on-premise deployment and want an ERP system that can be configured according to the number of users. Some limitations to this type of license are additional costs for further infrastructure upgrades and access may not be available anytime and anywhere.

 

Other types of software licenses include consumption-based models, floating subscriptions, and named-user plans.

 

2. Personnel

 

You also need to consider how many of your staff will use the ERP software, which tools on the platform they require for their job, and how often they require access. Some vendors adjust their subscription pricing based on the needs of certain levels of users. For example, some of your personnel may only need to access inventory functions in the ERP system while other individuals may require full access to all functions.

 

3. Infrastructure

 

Determine if you need additional hardware or software for successful ERP implementation. Do you have enough servers, computers, office space, cooling systems, and storage? Will you require hosting, mobile devices, upgraded power systems, and better internet service? The type of infrastructure you need is determined by your preferred method of ERP deployment.

 

4. On-Premise vs Cloud-Based Deployment

 

On-premise ERP systems implementation requires larger upfront and ongoing costs since you need to have in-house network equipment, hosting, and servers that usually will require an IT or maintenance team. However, this can be a more cost-friendly option if you already have the required infrastructure.

 

Meanwhile, ERP software is deployed on a cloud and is typically hosted remotely by the vendor. This makes it a more affordable and hassle-free solution for businesses that do not have the resources to invest in additional infrastructure for ERP implementation.

 

5. Customizations and Integrations

 

Your organization may require certain ERP software features and add-ons to make the platform’s functionality more suitable for specific business processes. For example, an ERP system for healthcare requires centralized patient records and regulatory compliance tools while ERP software for restaurants needs order placement features and recall management.

 

ERP software also tends to come in a modular design, meaning users can add new functionalities over time as their needs change or grow. For instance, you may require only accounting tools in the beginning, but as your business expands, you might need to add reporting and logistics modules to your ERP system.

 

More software customizations and integrations will usually require more complex ERP implementation and additional costs.

 

Aside from the features above, you also have to look into the hidden costs of your ERP software deployment. These are usually unforeseen expenses during and after the ERP system implementation such as training new employees, hardware or software upgrades, maintenance, and security and data management among others.

 

Data from Statista shows that 47% of organizations faced budget overruns for their ERP implementation, and one of the reasons for going beyond the allocated budget was failing to include these types of hidden costs.

 

 

Justifying Your ERP Implementation Budget

 

After considering all the factors that can affect your ERP systems deployment budget, the next crucial step is to see if the expected costs are justifiable. Here are a few tips:

 

• Analyze and document the internal business environment to determine the potential benefits of the ERP system. Assess which areas and processes have bottlenecks and inefficiencies. Is it in streamlining processes, communication, managing data, or improving organization? Identifying what you need to improve on can help you quantify the benefits of investing in ERP software.

 

• Show areas where ERP solutions will have the most impact. Present what goals you want to achieve and how the ERP implementation can help you reach those aims. Also try to identify which areas, departments, and processes will benefit most from the ERP software, such as your supply chain, sales, finance, etc.

 

• Determine the ROI. Return on investment is measured not only by the financial gain you can expect after implementing ERP systems but also by the direct and indirect benefits you achieve. This can include reducing your overall operational expenses, improving your customer satisfaction, acquiring more clients, boosting sales, and increasing efficiency. This allows you to gain a better and broader picture of the ROI and assess how justifiable the ERP implementation costs are.

 

 

Building a More Realistic ERP Implementation Budget

 

 

Investing in ERP systems is an exciting step toward improving your business processes and services. However, a crucial step to ensuring your ERP software will actually help your organization grow is making sure you set a realistic budget from the onset. This is more manageable if you have a better understanding of your company’s needs and of the costs associated with the entire ERP implementation process.

 

Having a realistic budget, consulting with vendors, and asking for quotes can also help find the ideal ERP software provider.

 

 

Want to learn more about other aspects of the ERP system? Check out our blog topics related to ERP Systems:

 

• How to Choose the Right ERP System for Your Business
• Benefits of Implementing an ERP System in Your Business
• Common Challenges in ERP Implementation
• Key Steps to Success in ERP Implementation Strategies
• Reducing Costs and Increasing ROI with ERP
• Understanding the Types of Tiers in ERP Systems