Costs of an ERP System
What Is an ERP System?
Many companies began using enterprise resource planning (ERP) systems rather than accounting software applications.
An ERP system differs from accounting systems in that accounting systems only perform accounting-related tasks. An ERP system, however, can handle not only accounting tasks, general business management tasks as well.
Overall, it's a more powerful platform.
An ERP system is essentially a suite of software packages that can perform accounting, product planning and development, manufacturing, inventory management, sales management, human resources, and other business tasks.
Like the costs of an accounting system, you will want to consider not only the licensing fees when choosing an ERP system but the total costs of the ERP system itself:
- Development for Customization
- Process Redesign
Cost 1: Implementation
It's necessary to have professionals install and configure your ERP system, so you will need to include these implementation costs in the total price of the ERP system. ERP systems are complex software applications, so you will likely need to change operating systems, upgrade or change servers, and change other hardware and software you use on your company’s network in order for the ERP system to run properly.
You will also need to – or should – set up a test environment as part of the implementation so you can test the ERP system without affecting your company’s real data. This can save a lot of potential working hours if there an issue with implementation.
Cost 2: Training
As mentioned, an ERP system is a complex software application that can be thought of as a suite of software programs that are simultaneously compatible. Your employees will need training on how to use the programs, because an ERP system is not as intuitive or easy-to-use like a basic accounting software program, such as QuickBooks or Peachtree.
Your company’s employees will need time and training. Often, the ERP vendor will provide additional training upon request at a standardized hourly rate. There will be times when a consultant becomes necessary, in the case of specialized content or particularly difficult need arises. In any case, you will need to factor these additional costs into your analysis when reviewing ERP systems for purchase.
Cost 3: Development for Customization
The out-of-the-box functionality of an ERP system will not be enough for you to operate your business effectively. You will need to incur some expense in developing customized reports so that your employees can perform their daily and monthly tasks with ease. An ERP system can store a substantial amount of information, but users are limited in the ways that they can access the information. Therefore, it is not uncommon to have IT staff dedicated to developing customized reports for various departments so that business processes and analysis can be performed timely.
Cost 4: Process Redesign
If your company is upgrading from an accounting software program to an ERP system, then you will certainly have a lot of processes that will need to be redesigned. For companies using accounting software, many tasks may be performed outside the software either manually in a paper format or a third party application such as MS Excel. The acquisition of an ERP system should, in theory, mean that many of these tasks are being automated by the software to increase both accuracy and efficiency in performing these tasks. Even if your company is changing ERP systems, no two are alike so you can expect to have some changes in your company’s business processes to coincide with the software’s processes.
Cost 5: Maintenance
You will need to maintain your ERP system so you will need to factor in these costs. ERP costs can include hardware, network, and labor costs from IT and other departments to ensure the system can run properly.
Maintenance costs for an ERP system typically run between 15–20% of the initial purchase price. An ERP set-up that cost $250,000, would carry, in theory, a maintenance cost of $37,500 to $50,000.
Cost 6: Upgrades
Like all software programs, ERP systems require periodic upgrades to avoid becoming obsolete. You should consider how often you expect to upgrade your ERP system, and what these costs will be when you go through with the upgrade. You should also consider that any upgrade may affect business processes, and require additional hardware or software so the system runs smoothly, if you're business is not run on a mirrored set-up while performing the updates or data transfer.
Cost 7: Support
Your employees will run into trouble using the program, and you will detect numerous bugs with any ERP system so you will want to ensure that your vendor will provide you with adequate technical support to resolve these issues. You should ask your vendor if this support is included in the licensing fee or is an additional cost, as tech support can end up affecting your bottom line if not included in the initial purchase, and isn't closely monitored.