When deciding whether or not to implement a software solution, it’s essential to first make sure that your company can actually afford a new program. The cost of ERP software is a major factor that leads some companies to go with a different type of solution, such as a standalone CRM or manufacturing program. However, as ERP cost becomes more manageable for a range of companies, it has become an increasingly popular solution on the software market.
In this article, we’ll discuss key aspects of ERP cost such as the factors that affect the price of an ERP system, ERP pricing models and how to create a software budget.
- On average, support and maintenance costs make up 15-20% of a software budget.
- SMBs use, on average, seven internal resources, and enterprises use about 24 when deploying ERP.
- A study showed that 45% of organizations went over budget on their ERP deployments.
- ERP cost is dependent on multiple factors and can range from $75,000 to more than $10 million.
ERP Software Basics
Before we get into the cost of ERP software, it’s important to recognize common features that are often part of an out-of-the-box package. When reading about these basic functions, it’s important to note that availability and specific capabilities vary from vendor to vendor, so keep that in mind when calculating the cost of necessary add-ons for the system that you purchase. For example, you might need transportation/logistics functionality in your program, which might be included in the base package of Vendor A but only be available as an add-on or third-party integration through Vendor B.
Here’s a list of some common functions included in base ERP software:
- Financial Management
- Supply Chain Management
- Warehouse Management
- Sales Order Management
- Distribution Management
- Human Capital Management
- Customer Relationship Management
- Transportation/Logistics Management
Factors that Affect ERP Cost
There are a wide variety of factors to consider before making your ERP selection. The cost of an ERP system can range from $75,000 to more than $10 million. With this huge variance in cost, it’s important to measure how different aspects will contribute to the final price of a system. Here are some of the common monetary costs that you’ll need to look out for before making your software decision:
Number of Users
When deciding whether an ERP program is affordable or not for your business, you need to estimate the number of users that will initially have access to the program. Many ERP vendors charge on a per-user basis, meaning the more people who use it, the more expensive it gets. You also need to account for the cost of adding new users to your system and how that expense could increase in the future as your company grows. You’ll need to check with the specific vendor you’re interested in to see if they charge per-user, especially if you have a large number of employees who will need access, as costs can quickly add up.
Add-ons and customization or configuration of a program aren’t cheap. This is why you must find a system that meets most of, if not all, of your core needs through its out-of-box functionality. Many vendors offer integrations with third-party add-ons or the option to include specific modules for increased functionality in your program. The cost of these additional capabilities differs depending on what you decide to include and which vendor you go with for your base package.
Depending on the technical expertise of your internal employees, you may decide to leverage an ERP consultant to help make the process of implementing an ERP system more simple. Most vendors offer some form of support that may or may not include installation and employee training. Some ERP programs have a list of their preferred consultants who are most experienced in helping an organization implement the software successfully. Additionally, some vendors offer more consultative assistance, but this costs extra as well.
If you are looking at implementing ERP for the first time, you will likely need more dedicated technical assistance than a company that has experience deploying this type of program. Deciding whether vendor-offered help or a consulting service is best for your business is a key factor to consider when looking for the best ERP software for your business.
The upfront cost of deploying an ERP solution on-premise is more expensive than that of a cloud-based program. However, the overall cost of these deployment methods evens out when you consider monetary factors such as fees for training, maintenance and customization. There are pros and cons to both of these deployment methods, with upfront payment being one aspect that makes cloud deployment more appealing to some businesses. If you’re more interested in an on-premise solution though, you should remember that although upfront costs are higher, companies with cloud ERP software end up paying about an equal amount for their solution in the long run.
Training and customer support are two essential components to consider when estimating the cost of an ERP solution and how well a program will work with your company’s needs. Support and maintenance costs make up, on average, 15-20% of a software budget, making it a big chunk of your price consideration when it comes to calculating ERP cost. Some vendors offer their own training options on-site and via online tutorial videos and classes. However, this assistance may or may not be included in your overall software price depending on the vendor you go with. Additionally, more hands-on training options, such as having a specialist come to your place of business to help employees learn more about the program, typically costs more than receiving training through virtual self-paced courses.
Software Maintenance and Upgrades
Making sure that your program stays up to date is something that you’ll need to account for when developing your budget and ERP cost estimate. Additionally, the program will regularly need upgrades that may or may not be included in your base software costs. You’ll need to ask your vendor how often updates are made and whether or not the cost of these changes is included in the base price of the system.
Non-Monetary ERP Cost
The financial cost of ERP is likely what made you click on this article. However, there are significant non-monetary costs associated with an implementation that you also need to consider as you prepare to select a program and undergo deployment. Here are some of the other “costs” you’ll need to factor in as you get ready to install an ERP system.
Implementing an ERP system takes about 14.1 months on average, according to a 2019 study from Panorama Consulting. SMBs use, on average, seven internal resources, and enterprises use about 24 when deploying ERP. Therefore, you need to account for lost employee time and consider how you will make up any slack during this period. For example, will different employees step up to the role of those committed to the project during this time? Will you hire contractors? These are important factors to consider when conceptualizing your ERP implementation.
With a group of your IT staff devoted to ERP implementation, productivity is likely to decrease in the interim. This lapse in productivity is temporary, and productivity should actually increase once your ERP solution is deployed successfully. You should expect projects to take longer to complete and queries to take longer to answer if you don’t have a backup plan for your staff members who are devoted to the ERP deployment. Additionally, when training users on how to use the ERP software after it’s been deployed, productivity will be reduced as employees go through courses/training and get used to the intricacies of using the system.
ERP Pricing Models
There are two main pricing strategies that vendors typically use when developing the cost of a system. Let’s take a look at these different pricing methods and examine some of the intricacies of each.
Perpetual licensing is most closely associated with on-premise or on-site software installation. With this pricing method, users pay a one-time fee upfront for access to a program. This cost is based on factors such as the degree of customization and number of users. This price often doesn’t include recurring fees for aspects such as support, maintenance and upgrades.
A subscription-based pricing method gives customers access to the program on a monthly, yearly, or multi-year basis. Subscription pricing is most applicable to companies that go for a vendor that offers cloud deployment. Most subscriptions come with stipulations such as a minimum contract length and various pricing tiers depending on the functionality that your company opts for.
Creating Your ERP Software Budget
So how much should your company spend on an ERP system? It’s important to know the answer to this question before definitively choosing a vendor for your business. You’ll want to account for the different types of costs associated with an ERP system when estimating how much you will spend, but determining how much your company can spend while still being in the clear might be the most important aspect of ERP software selection.
ERP software can be a significant expense. This means that when developing your ERP budget, you will need to have access to your company’s operating financial data and budgeting information. After all, you don’t want to lose your financial footing while trying to implement your solution. With this in mind, you need to account for recurring fees associated with ERP and ensure that your company’s overall finances can support these ongoing costs. You wouldn’t want to invest a lot of money into a program only for it to become obsolete or difficult to operate in a handful of years.
To begin the process of creating a software deployment budget, you’ll want to take note of the ERP costs listed above. If you don’t feel like scrolling or can’t remember them off the top of your head, these factors are training, maintenance, support, deployment method, customization/add-ons, upgrades and number of users.
Based on your company’s needs and the quoted prices from relevant vendors, you’ll want to develop an estimate of what the entirety of an ERP program would entail. You’ll want to ask yourself: “Can my company support this financially?” and “Will the ROI of an ERP solution be worth the initial cost?” If the answer to both of these questions is yes, then you’re in luck! You’re probably in a good enough spot to continue seriously looking for a program.
It’s recommended that you secure more funds than you’re estimated to need for your ERP project when creating your budget. Why? ERP implementations frequently go over the estimated budget. Panorama Consulting’s 2019 report found that 45% of surveyed organizations experienced budget overrun. The last thing you want to do is have the finish line in sight but be unable to reach it because you don’t have enough capital left to complete the project.
ERP cost ranges from $75,000 to more than $10 million, but the price you pay is dependent on your company’s needs and how good of a job you do at planning for implementation. The cost of ERP doesn’t just hinge on your subscription to or licensing of a program — it includes aspects such as the number of users, deployment method and training. Therefore, when estimating how much it will cost your business, you need to consider these diverse factors. Because ERP is so expensive, you need to make sure that it hits all of your company’s main bullet points and that its cost isn’t too significant for your company to handle.
What are some ERP costs that surprised you during your selection process? Enlighten us in the comments below!