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ERP Costs – Are you only seeing the tip of the Iceberg?

By July 2, 2020September 19th, 2022ERP Evaluation, ERP Implementation, ERP Strategy

When we are working with our clients through the Executive Engagement and Planning Stage for a new ERP, there is always one question that gets asked.

What is it really going to cost?

Many of our clients have attended trade shows, participated in online webinars, had multiple meetings and presentations with Vendors and generally still feel unsure about the “real” cost of implementing a new ERP for their organisation.

There is so much information available that it can become very confusing very quickly. The focus is usually on assessing Vendors and Solutions but without a clearly defined process and without a “measuring stick” to compare all the options, it will be nearly impossible to make the correct decision.

Many ERPs are marketed based on a cost model that includes user licenses (including recurring subscriptions), hosting, design and implementation, annual maintenance, and support costs. However, these costs are really only part of the “actual costs” of implementing an ERP.

You will need to clearly understand the real costs of an ERP implementation and the expected and tangible benefits before you can write your Business Case

Peter Goes - Managing DirectorCombined Management Consultants

What are the other costs?

Other real costs that are often not considered in the sales discussions are the people costs, either internal or 3rd party resources that will be involved in delivering a successful project.

It is important to dig into the details to ascertain the real costs to the business. These costs can only be worked out using a formal framework and very detailed planning around the following Workstreams.

1.    Strategic and Executive Alignment

Executive engagement and commitment to ensure the organisation knows “Why” a new ERP is being implemented is paramount to success. It is imperative that the senior leadership supports the activities and communicates the right messages about the project clearly to all stakeholders. It is also critical that the executives have reviewed the software, maintenance and support contracts

Key workstreams that can assist to define the costs and benefits early on in the project lifecycle include:

  • QA Review of the Vendor’s Project Plan and Licensing Proposal involving all resources (internal and external). Any assumptions underlying proposed costs should be carefully scrutinised.
  • ERP Technology Investment Model showing First Year, 5 Year and 10 Year Costs of Ownership. This should include infrastructure and hosting costs as well as software upgrade costings.
  • Realistic Business Case and Business Benefits Realisation Plan to ensure the investment will provide a return on investment in a required time frame.

2.    Operational Readiness

If the organisation is going through a business transformation or a technology refresh, then the senior leadership team will need to know the impacts of this transition on the processes, people and technology. The organisation must be ready for the new ERP.

Key workstreams that can assist to define the costs and benefits of Operational Readiness include:

  • Operational Readiness Assessment to ensure that all areas of the business are working cohesively, and workflows and decision models are aligned with the business strategy.
  • Documentation and Validation of Functional Requirements to ensure that the scope of the new ERP is well defined and agreed by all parties.
  • Analysis of the Maturity of Processes and Procedures to check that there are no canyons in the functional design of the new ERP system, and it will operate as intended in the business.

3.    People Readiness

The skills, competency and readiness of the users to embrace a new ERP system is often one of the areas that is not given enough consideration. A new ERP will often mean changes in job roles and responsibilities and training will be essential to the adoption of new ways of working. You may do well to engage the services of a Change Management specialist on part time or full time basis to optimise the transition experience for your users. This will also pay dividends in the long run.

Key workstreams that can assist to define the costs and benefits of People Readiness include:

  • Skill Gap Analysis to identify areas for development and improvement of your people in the business and in IT.
  • Training Needs Analysis to identify the Business Process Owners and staff who will need training and on what modules.
  • Organisational Change Management Plan including Communication and Training Plans to support the ERP implementation.

4.    Technical Readiness

This will determine if your organisation has the technical support it needs to ensure a successful implementation. If you have an internal IT department, you will need to consider the costs of your staff to support the technical aspects of the implementation. If you need to engage 3rd party contractors, these costs will also need to be added to your budget.

Other areas you will need to consider will include activities associated with data cleansing and conversion, interface development, report writing and dashboards.

Key workstreams that can assist to define the costs and benefits of Technical Readiness include:

  • Solution Architecture Diagram to support the overall design of the system.
  • Master Data Management Plan to understand who “owns” what data domains within the system.
  • Data Cleaning, Mapping and Migration Plan to move from your existing systems to the new ERP.
  • Identification of Super Users who will provide technical and user support the ERP post implementation.

5.    Project Governance and Planning

Overall project management of an ERP implementation is essential and is another area that should never be underestimated in terms of the necessity and value it will bring to the success of a project.

Depending on the size and complexity of your ERP project, this may be a part time role but more often than not, a full-time role for a highly experienced and qualified ERP Project Manager. The project manager will also track and monitor progress and manage the governance, probity and risks of the project, reporting through to the Steering Committee monthly or more often if required.

Key workstreams that can assist to define the costs and benefits for Project Governance and Planning include:

  • Detailed Implementation Plan that includes all resources and costs.
  • Risk Management and Mitigation Plan

Some of these workstreams can be completed in parallel but they all have “real costs” associated with them and need to be considered before you embark on any ERP journey.

How do you work out what it is really going to cost?

The only way to know what it is really going to cost is to prepare a very detailed project plan with all resources, activities and costs of internal staff (plus back filled roles), vendors, consultants, specialists of those involved across all the Workstreams above for the duration of the project. A key element of this planning is agreement on what constitutes the core functionality to be implemented as the first release of the system.  Scope creep is usually the biggest risk to cost blowouts.

How do you know whether your money will be well spent?

To know whether your financial investment is going to be worth it, you will need to build a realistic Business Case for the ERP project. The costs will need to be assessed against the benefits you are looking to achieve and the timeframe in which you are wanting to deliver the result for the business.

To fully answer the question of what it will really cost, it is essential that businesses allocate appropriate resources to the Feasibility and Planning stage, including the workstreams applicable to the situation. Incomplete planning very often results in disappointment and cost expectation misalignment.