How Much Does a Typical ERP Implementation Cost?
Costs of Implementing an ERP System
There are many reasons companies begin the search for new Enterprise Resource Planning (ERP) software. Many companies outgrow their entry-level accounting software packages, such as QuickBooks or Peachtree. Others find that their existing software does not integrate with other third party software systems and creates the need to do more work. Whatever the reason, the first question you will likely ask when purchasing a new ERP system is “How much will it cost?”
Total Cost of Ownership: Do Not Forget Hidden Costs
The total cost of ownership includes a variety of costs, not just the software licensing fees. An ERP Panels whitepaper indicates that there are four costs to ERP implementation:
- Software license fees
- Maintenance fees
- Implementation services
However, other implementation specialists suggest that these costs run much greater than those cited in the ERP whitepaper. IQMS, which has been offering ERP Software systems since 1989, cited numerous other hidden costs in their experience of performing ERP implementations that business owners should consider. According to IQMS, the total costs of ERP ownership include:
- Hidden Cost No. 1: Implementation
- Hidden Cost No. 2: Training
- Hidden Cost No. 3: Development for Customization
- Hidden Cost No. 4: Process Redesign
- Hidden Cost No. 5: Maintenance
- Hidden Cost No. 6: Upgrades
- Hidden Cost No. 7: Support
IQMS recommends that you should make sure that your software vendor includes all these costs in their proposal to you, and that you will have a good estimate of the total costs if they are willingly "putting them on the table" for you to see.
Estimating Costs: Rules of Thumb
The total costs of implementing will never be known until you complete your project because hindsight is 20/20. However, such retrospective analysis will do you little good in evaluating your budget that is prepared prior completing the implementation of your new ERP system. While you can never know with any precision what your final costs will end up tallying, you can ensure that your budget is at least reasonable. There is no worse feeling in the business world than being over budget, and many projects are over budget only because they are under budgeted.
So make sure to just do some simple checks to see that all the costs are included, and then that the budgeted costs seem reasonable.
This begs the question of "What are reasonable costs?" The best advice comes from J. Carlton Collins, CPA who wrote that "The reality is that the cost of implementing a mid-market to high-end accounting software system will typically range from 1:1 to 2:1 compared to the cost of the software."
This simple rule of thumb can guide you in your total costs. My experience has been that the total cost overruns are usually much greater than that of adequate planning, preparation, and testing. You should expect to spend 20-25% of your costs in this planning and preparation phase, and Collins indicates that only 10% of costs are spent on actually implementing the software while the lion's share of the ERP implementation costs is training costs.
The Take Away
The takeaway here is that you need to consider that your total costs of ERP implementation include all the costs, and that these cost estimates are reasonable if you want to get an accurate picture of what you will be spending on your new system. You should also devote adequate resources to planning, preparation, testing, and training because if you do not spend money in these areas, then you will likely end up spending more anticipated for your ERP system implementation.
Costs of ERP Implementation. "Beyond Software: How to Budget the Cost of ERP Implementation Services ". Sherwood.com. Retrieved 26 August 2013.
Hidden ERP Expenses. "Why Price Shouldn’t Be the Final Factor When Investing in Manufacturing ERP Software: The Hidden Expenses Often Found in Low-Cost ERP Systems". Iqms.com. Retrieved 26 August 2013.
Carlton, J.C. "Implementation Costs: A discussion about the cost associated with implementing an accounting system or ERP solution". ASA Research. Retrieved 26 August 2013.