Exploring the factors that can influence the cost of an ERP solution.
Investing in an enterprise resource planning (ERP) software is one of the most important capital expenditures any small or mid-sized business (SMB) can make for the future. ERP is a business management solution that manages and integrates an organization's various business processes into one unified system. Processes such as accounting, invoicing, manufacturing, inventory and sales management, payments, and HR are consolidated, and the ERP solution streamlines these processes and information across the entire organization. In short, an ERP solution is the foundation of any business and plays a significant role in continuous growth and success.
In this blog post, we will explore the factors that influence the cost of an ERP solution, discuss why cloud-based ERP is more cost-effective for most businesses, and how companies can budget for one.
Factors That Influence an ERP Software Project Costs
How to determine how much an ERP project will cost your business? The answer is that it all depends on a multitude of factors. ERP providers have different pricing models, but the software costs will generally depend on the size of your organization, the type of system you want, required functionalities, user access levels, and many other factors. Here are some of the critical factors that influence the cost of an ERP solution:
Software Licensing Model
The license cost varies based on the number of users and your licensing model. Based on the most appropriate deployment model, software licensing can be grouped into two main categories: perpetual licensing for on-premises solutions and subscription-based licensing, typically for cloud-based solutions.
Perpetual License (On-Premises)
This licensing model enables a business to host the solution on their own servers on-premises. Though there is an annual maintenance fee to access upgrades to new software releases, perpetual licenses offer a well-defined ownership cost. It allows permanent use of the license without ongoing subscription costs. The perpetual license model can be a cost-saver for those with existing hardware capacity and companies with extensive, dedicated IT resources. However, the upfront investment cost is often a barrier to entry for many small businesses.
Subscription-based License (SaaS)
The SaaS subscription model is popular with small businesses as it offers a lower cost of ownership. SaaS ERP solutions are typically billed as a subscription on a monthly or annual basis. This model incorporates cloud-based hosting, so a business does not need to invest in a high-cost infrastructure overhaul or heavy upfront license fee as the software vendor manages and hosts the software. There is a lower upfront cost as you don't need to invest in hardware and servers to get your solution up and running.
Type and Size of Business
The industry your business falls under is another factor that can impact the cost of an ERP solution. For example, a company in the manufacturing and distribution space will tend to have more complex processes and requirements than a professional services firm. You'll likely require more modules, which will add to the cost. Similarly, the size of your business and the number of users you have will also impact pricing. As a rule of thumb, the larger your company is, the more users you have, the more complex and varied processes you require - your ERP solution project will cost more than that of a smaller business with fewer users.
Implementation Costs
Another thing that impacts the cost of an ERP solution is the cost of implementing your solution. Typically, implementation services land about 1.5 times your initial software cost. (This is for a straightforward implementation with very minimal custom development.)There are a few approaches to implementation pricing, and the option you pick can impact your budget. The type of ERP implementation you choose depends mainly on the size of your business, how complex your processes are, and the number of users who will be using the ERP solution.
Time and Materials ERP Implementation
When it comes to this model the cost shows what is required for solution implementation based on a company's specific requirements. This approach ensures your ERP system is tailored as per your needs. Some of the main factors that can impact implementation cost include the features required for configuration, add-on solutions, the complexity of business processes, server/network hardware purchase or upgrade, and user training.
Fixed-Fee Implementation
The ERP implementation will come with a fixed price in this approach, based on your discovery session and requirements. A fixed-fee implementation has a definite scope, which means your software will be implemented based on a specific list of deliverables agreed upon between you and your ERP partner. Costs can increase in these types of implementations if the project scope changes.
Lean Implementation
The ERP partner follows a directed approach that dictates the basic features and functionality for implementation based on classic market needs. It is a repeatable technique that is designed to control the costs and speed up the implementation. However, you might have fewer features and functionality than expected. For anything changed or added beyond the scope increases the cost.
Software Customizations
The standard system functionality that is available out-of-the-box from an ERP solution may meet many companies' needs. Still, those with unique processes may need to get customizations, increasing implementation costs. The cost will depend on the project, and it is relative to the benefits you want in the business. You should also carefully evaluate the experience of the ERP partner while considering any level of customization. Some ERP partners have more custom development experience than others, which affects the cost and return on your investment.
Training
An ERP solution is a complex piece of software application with tremendous potential to transform your business – provided it is being used properly by your end-users. To make the most of an ERP solution, your employees will need formal training on using it. Your ERP implementation partner will often offer additional training to the staff at a defined hourly rate. Robust user training is one of the key factors in determining the success of your ERP implementation, so it's important not to skimp out on this step.
Ongoing ERP Costs
If you are going for an on-premises ERP solution, there will be ongoing costs to budget for. You'll have to pay an annual maintenance fee for every license in many cases. You'll also be spending time and money on software upgrades, whether it's done in-house by your internal IT team or handled by your ERP partner. Scaling an on-premises solution will also add on the costs, for example, more infrastructure.
So, What's The Ballpark Estimate for an ERP Project?
For a mid-sized organization, it's been estimated that an on-premises ERP solution, including software and implementation is likely to range between $150,000 and $750,000. This is a rough guideline only to give you a general idea.
Most mid-market ERP systems deployed on-premises are typically sold by the module. Depending on your company's type of business, you may require anywhere from 7 to 20 different modules to support the process requirements. Implementation services will land about 1.5 times your initial software price if the implementation is straightforward and without too much custom development.
On top of that, you will have the cost of the server hardware, server software, database software, and annual maintenance fee for all the software, which is usually around 15% of the list price.
Why is Cloud ERP Considered More Cost-Effective than On-Premises?
Is cloud ERP actually cheaper than on-premises? The big difference in price between an on-premises and a cloud-based solution is that initial software cost does not happen with a cloud-based solution. For instance, say you've chosen Dynamics 365 Business Central. The essentials package will already come with many modules you would need, included in the subscription price.
Essentially, cloud ERP has a lower cost of entry and a lower cost of ownership when compared to on-premises ERP. This is because an on-premises solution is maintained and hosted by the customer, while with cloud-based solutions, the software vendor maintains and hosts the software. With a cloud ERP solution, you do not require necessary hardware, server and database software, or security and backup software. You are also not paying an annual maintenance fee or using your internal IT resources for upgrades, as maintenance, upgrades, and bug fixes are automatically handled by the provider. Not to mention, there are numerous other cloud ERP benefits.
On-premises ERP systems, on the other hand, usually require a great investment of space, hardware, software, and workforce to implement and keep them running. In addition, upgrades can be costly and time-consuming since many businesses tailor the software to their unique requirements. At the time of enhancements release, integrations and customizations require testing, and users may need training again, which causes great disruptions to the business, like a new implementation. Because of this, many companies go without upgrades and keep using older versions of applications. This can erode the value of your ERP solution.
Final Thoughts
There are many factors that come into play when figuring out the cost of an ERP project for your company. Some of these key components include:
Software licensing fees
Implementation type
Cost of hardware and infrastructure
Customizations
Testing and training
Post-implementation support
Don't forget to select an ERP partner who you can trust as your partner is key to a successful ERP project. Your ERP partner will ensure your digital transformation project stays on the right track and help you keep on budget.
Kwixand Solutions Can Help
As a Silver Microsoft Dynamics 365 Partner and ERP consultants, the team at Kwixand Solutions guides businesses across North America through the entire ERP journey - from ERP selection, to implementation, support and training, and more. For us, successful digital transformation is much more than just implementing a solution, it's about helping businesses achieve their goals and maximize their ROI. We work with you to transform your business processes so you can provide the best experience for your customers! To learn how we can help you, book a free consultation with our team today.