Define ERP Implementation Costs

The allure of an Enterprise Resource Planning (ERP) solution lies in its remarkable adaptability to cater to the unique demands of each company. Whether your primary focus is financial and accounting capabilities or the integration of human resources, customer relationship management, manufacturing, and supply chain management, an ERP system has you covered. As a consequence of these diverse needs, ERP prices can vary considerably. No organization wants to discover, halfway through an ERP implementation, that it lacks the financial resources to see the project through to fruition.

Another crucial factor influencing costs is the choice of deployment for the ERP system: on-premises or in the cloud. In recent years, an increasing number of companies have favoured cloud-based ERP solutions due, in part, to the significantly lower total cost of ownership. Consequently, this article is centred on cloud-based ERP implementation, outlining the factors that influence pricing and offering insights into formulating a precise budget.

Components of ERP Implementation

The composition of an ERP implementation hinges primarily on the specific needs of a business. By definition, an ERP system empowers a company to manage various operational functions – encompassing finance, human resources, supply chain, manufacturing, marketing, and more – through a unified database. This unification ensures that stakeholders across the organization work with the same foundational knowledge. ERP systems can also streamline processes, enhance productivity, and refine decision-making.

To ensure a successful ERP implementation, it is vital to devise an implementation strategy that delineates how the new system will be introduced. This strategy can range from an all-at-once approach to phased rollouts, coexisting with legacy systems, or a combination thereof. Additionally, businesses must understand the phases inherent in a cloud ERP implementation:

1. Discovery and Planning: A best practice in ERP implementation is to commence with thorough research, typically involving a project team that assesses needs across multiple departments and engages in vendor interviews, demos, shortlisting, and contract signing. This phase culminates in creating a project plan, detailing objectives, timelines, and budgets for implementation and ongoing system operation.

2. Design: Armed with insights from the project team, an ERP implementation team comprised of key stakeholders and internal and possibly external resources embarks on the following three stages: design, build, and test. During the design phase, the project team outlines integrating new workflows into the ERP solution, heavily relying on input from those who will predominantly use the ERP. Gap analysis is also conducted to assess areas where the ERP solution may fail to achieve desired outcomes, enabling timely collaboration with vendors and partners to bridge these gaps.

3. Development: The ERP implementation progresses into the development phase, with internal and if required, external resources collaborating with the ERP vendor to customize the system in line with the organization's requirements. Customizations stemming from the gap analysis in the design phase must be implemented during this phase. Additionally, integrations with other crucial business systems that need to interact with the ERP, such as industry-specific software, are considered. Crucially, the development phase signifies the initiation of the pivotal data migration process – consolidating data from disparate systems into a unified, pristine central database.

4. Testing: Depending on the development approach, testing may or may not be a distinct phase. In agile development methodologies, development and testing unfold concurrently. Testing can be carried out on specific ERP system components, depending on whether the implementation is planned as an all-at-once deployment or in phases. Irrespective of the approach, this phase should include everyday ERP users who scrutinize workflow accuracy and data migration success. Furthermore, end-user training usually commences at this stage.

5. Deployment: The success of deployment hinges on a concerted effort, uniting internal, external, and vendor resources to help users overcome their natural resistance to change and adapt to new processes. This phase also involves migrating data deemed too critical to move earlier. Some companies may temporarily run the new ERP parallel to their existing systems as a safety net. Additionally, specific organizations mitigate deployment risks by initially launching function-specific modules, assessing results, and then gradually adding new modules over time.

6. Maintenance and Support: Significantly, ERP implementations like these don't conclude with the flip of a switch. Project teams remain in learning and adaptation mode well after the system launch. Although cloud-based ERP systems receive automatic updates from vendors, the dynamic technology environment in most companies leaves room for potential integrations between the ERP and external systems. This continuous evolution necessitates ongoing support and maintenance.

How Much Does ERP Implementation Cost?

Determining the precise cost of an ERP implementation is a complex endeavour, largely due to the unique variables involved in each company's scenario. The ultimate price tag is influenced by organizational structure, user count, desired functionality, internal resource allocation, data volume, and the extent of integration with additional systems. Broadly speaking, ERP implementation estimates, whether for on-premises or cloud-based solutions, can range from low-to-mid five figures for small businesses to several million dollars for larger enterprises. Notably, on-premises solutions typically incur higher initial and ongoing costs than cloud-based counterparts, as they entail the purchase and management of infrastructure, hardware, and software licenses.

Key Takeaways

• Cloud ERP implementation costs depend on project scope, available resources, and customization requirements.
• Variables that impact costs include user count, desired functionality, the extent of customizations, and the need for integrations.
• Cloud-based ERP solutions are more cost-effective than on-premises implementations involving substantial upfront expenditures.
• Certain expenses related to ERP implementation can be capitalized, meaning they are spread over time.

Explaining ERP Implementation Costs

Costs associated with cloud-based ERP implementation fall into two primary categories: software subscriptions and people costs, each comprising various variable subsegments. Here is a breakdown of these costs:

1. Subscription Costs: The primary expense of a cloud ERP system is the subscription fee, often expressed as a cost per individual for monthly or annual software usage. Shareable or "floating" subscriptions permit a specified number of users simultaneous access and are a less common practice. Alternatively, a consumption-based model based on transaction volume (e.g., invoicing or sales orders) may be employed. While this model suits specific businesses with high-value products but lower transaction volumes, it introduces unpredictability in long-term costs.

2. Staff Costs: ERP implementation necessitates internal resources; some may be dedicated full-time to the project, while others are involved only during specific phases. For instance, financial team members may be enlisted to test the ERP system's financial module. Consequently, the cost of their time, referred to as nonmonetary costs, should be factored into the implementation budget. Furthermore, external resources may be required depending on a company's size and the implementation scope. Expected external resource costs for cloud-based ERP systems include:

• Project Management encompasses teams evaluating potential solutions and those overseeing the rollout.
• Business Analysts: Key personnel who evaluate existing business processes and policies and outline how they align with the ERP.
• Technical Resources: Responsible for the technical aspects of implementation, customizing the solution, migrating data, building integrations, and overseeing testing.
• Change Management: Often overlooked, change management is crucial for preparing an organization to adapt to new workflows, processes, and systems. Consultants may be engaged for this purpose.
• Training: End-user training is vital for a successful ERP implementation. It ensures that system users are proficient with the new solution.
• Support: While some vendors include support in their subscription fees, additional support levels may involve extra costs.

Factors Influencing ERP Implementation Pricing

ERP implementation costs fluctuate based on the size and complexity of the project, as well as vendors' pricing models. Factors influencing pricing encompass:

• Number of Users: Many cloud ERP vendors charge fees based on the number of users accessing the system. Accurate estimation of user count is pivotal for projecting long-term costs, considering the potential addition of users due to projected growth. Usage patterns, such as tiered pricing for heavy users versus those with limited access, can also affect per-user fees.
  
  
• Number of Modules: Cloud ERP's modular design allows companies to add functionality as needs evolve. Pricing increases with each additional module, although some vendors offer bundled modules at a discounted rate.
  
  
• Add-ons: Cloud ERP vendors often offer modular components that enhance functionality, particularly for industry-specific requirements. These add-ons and extensions may incur additional costs.
  
  
• Customizations and Integrations: ERP solutions may require customization to integrate seamlessly with other software systems. Industries using specialized software may necessitate integration. The complexity of these integrations impacts costs.
  
  
• Consultants: ERP implementations often require external consultants, particularly for specialized tasks such as software selection, business management, project management, change management, technical consulting, and staff training. Consultants may charge fixed prices, hourly rates plus expenses, or recurring costs based on levels of effort.

Consider Nonmonetary Costs

In ERP implementations, not all expenses have associated hard-dollar costs. Nonmonetary or soft costs, such as time and productivity, can be equally impactful:

• Time: Time allocated by internal teams to the ERP implementation diverts resources from regular tasks, potentially leading to project delays and lost revenue.
• Productivity: Adopting new systems can cause a temporary dip in productivity as employees adjust to the changes. End-user proficiency may take time to develop.

Justifying the Cost of ERP Implementation

Constructing a business case to justify ERP implementation expenses and gain buy-in from key stakeholders is essential. A robust business case should:

• Identify Current Issues: Identify existing problems and their business impact, emphasizing processes requiring improvement.
• Assess ERP Benefits: Articulate how the ERP system will resolve identified problems and outline achievable goals, such as increased efficiency, optimized inventories, or enhanced customer service. Assign monetary value to these benefits.
• Evaluate ERP Options: Assess which vendors can best address the identified issues and goals.
• Estimate Project Costs: Calculate hard (software subscriptions) and soft (staff resources) costs, encompassing all factors.
• Determine ROI: Determine return on investment (ROI) by dividing the monetary value of anticipated ERP benefits by implementation and ongoing use costs, then multiplying by 100 to express it as a percentage.
• Identify Implementation Risks: Identify potential risks, likelihood, and anticipated costs. Risks can include timeline delays or failure to achieve specific goals.
• Create an Implementation Plan: Communicate expectations, costs, resources, challenges, and timelines to all stakeholders.

Determining Required ERP Features

Selecting the right ERP features necessitates thorough planning, analysis, and consultation with key stakeholders. Consider future needs; for instance, if an IPO is planned in a few years, functionalities for public company reporting should be prioritized. Expansion plans, particularly international expansion, should guide feature selection. Prioritize functionalities based on growth projections and evolving requirements.

Calculating ERP Implementation Budgets

Calculating an ERP budget is integral to the discovery and planning phase post-vendor selection. Essential considerations include:

• Functionality: Determine which modules and add-ons are required, establish the implementation timeline (all at once or staggered), and assess the vendor's implementation fee.
• Number of Users: Accurately project the number of users and the level of access required, considering future user growth. Understand the vendor's pricing model and usage expectations.
• Implementation: Assess internal skill sets and resource allocation for implementation. Identify areas requiring external resources, considering vendor implementation fees.
• Data Migration: Determine if internal resources can manage data migration or if outsourcing is necessary. Define data sources and migration methodology.
• Customizations: Identify systems requiring integration and assess whether in-house or consultant-driven integrations are necessary. Consider integration platform requirements.
• Training: Outline training requirements for users, accounting for training provided by the vendor. Understand where external assistance may be required.
• Support: Clarify the level of support required and whether it is included in the vendor's license. Explore additional support options and associated costs.

Creating an ERP Budget

Cloud-based ERP implementations reduce upfront costs but introduce other ongoing expenses, such as additional users, subscription fees, technical support, customizations, integrations, third-party resources, training for system updates, and data backup and recovery. Consider how implementation expenses are accounted for; while on-premises ERP costs can be capitalized, cloud-based ERP implementation costs are expensed. This distinction aligns with U.S. accounting rules.

ERP Implementation Calculator

Download NetSuite ERP Implementation Calculator From Atstratus

Use our ERP implementation calculator to estimate the cost of your ERP implementation. The calculator considers software subscriptions, staff resources, IT, and indirect costs to provide subtotals and an overall implementation total.

Choosing the Best ERP for Your Business

Selecting the right ERP solution hinges on understanding your business's current and future needs. NetSuite ERP offers cloud-based data management, covering finance, inventory, HR, professional services automation, omnichannel commerce, and analytics. It provides real-time insights, streamlines processes, enhances efficiency, and supports growth.

Calculate and Optimize Your ERP ROI

Solid projections are crucial for ERP ROI. To achieve an impressive ROI, identify current issues, assess ERP benefits, evaluate options, estimate costs, calculate ROI, identify implementation risks, and create a high-level implementation plan.

In conclusion, ERP implementation costs vary widely based on numerous factors, including the size and complexity of the project, user count, modules, add-ons, customizations, integrations, consultants, and nonmonetary costs. Constructing a robust business case, understanding feature requirements, and calculating an accurate budget are critical steps to successful ERP implementation. NetSuite ERP offers a comprehensive cloud-based solution to address diverse business needs effectively.