The top reasons for companies to implement ERP systems are to increase efficiency, replace outdated systems and improve functionality, according to a 2019 Software Path report.
However, business leaders can only guarantee these desired results by doing their due diligence at the budgeting and planning stages.
There are often more cost variables for implementing an ERP system than you can account for at first glance. In fact, you may be surprised to learn that the implementation process can cost up to twice as much as the software itself.
What are the factors involved in the process? Also, what drives the price of your actual software package? Before you lock in on a budget, it’s important to know and understand these key drivers of ERP implementation costs:
Licensing: Perpetual, subscription or both
The type of licensing you need depends on the type of ERP system you want to operate. Each license has its own pricing model and your cost will depend on the subsequent factors listed in this article.
- On-premise ERP: If you have an on-premise system and want all of your operations to remain that way, you’ll pay an upfront cost for a perpetual license
- Cloud-based ERP: For operations deployed to the cloud, you will pay monthly or annually for a subscription license
- Hybrid ERP: You may prefer to run some of your operations through the cloud while others remain on-premise. In this case, you would need licensing for both, and the cost of those licenses will depend on which functions you need for each
Cloud-based ERPs are the most popular option among those surveyed. Less than 10% of companies prefer on-premise systems, according to the Software Path report.
Your business: Size, industry and scope
Your ERP software cost will be greatly influenced by the characteristics of your business:
- Size: Most ERP software providers charge based on the number of users who will need access to the solution. The more users you need, the more you’ll pay. It will also cost more to establish ERP software in multiple locations.
- Access: You may want to provide different users with varying levels of access within the ERP system. Users with higher access levels will likely cost more than those with more restrictions.
- Industry: If you need ERP software that is specific to niche or complex industry processes, your software will likely be more expensive than a standard ERP for simpler operations, especially if you need customizations.
- Scope: Whether or not you’re already operating an ERP solution will also play a role, as will how modern that system is. There's a broader scope of change for companies without ERP systems and there’s a much smaller scope for a company that already uses a modern ERP solution.
Smaller companies are more likely to implement their first ERP solution, while the majority of larger companies (250+ employees) already have an existing ERP system, according to the Software Path report.
Extent of functionality: Apps, modules and customizations
ERP providers offer dozens of applications for core business processes. Each company will need its own combination of applications and capabilities to achieve its desired level of functionality. This will be a major cost factor, as each component has its own associated cost.
- One, some or all: Some businesses need the entire suite of ERP applications available—and perhaps extra applications outside of their ERP provider’s offerings. Others may only need modules for one or two processes. The more functions you need, the more you will pay to implement and use those functions.
- Customizations: You may need a module to do more than it does as a standard product, which means customizing it to your organization’s needs. Customizing a module will add to your cost, but it can make vital enhancements that greatly impact your business processes.
On-premise infrastructure: Hardware, upgrades and support
If you plan to operate an ERP solution on-premise, or as a hybrid of on-premise with cloud services, you must budget for infrastructure costs that don’t apply to cloud-based ERP solutions.
- Physical infrastructure: Your new ERP solution will likely require certain hardware, servers and databases that you will have to purchase and install.
- Support staff: Having an IT staff install, manage and maintain this physical infrastructure will have an associated labor cost and a potential training component.
- Upgrades: With an on-premise ERP solution, upgrades aren’t automatic or included, as they are with cloud-based systems. In order to upgrade, you will have to purchase the upgrade and have it installed.
Time and labor: Planning, training and execution
The time and effort that goes into an ERP implementation project is a significant portion of the budget, and there are many components that you can easily miss as you build expectations.
- Planning: Creating a plan for implementing an ERP system takes time and expertise. You can either pay a third party to consult with you, rely entirely on a team of internal experts, or employ a mix of both. Whichever you choose, factor in the costs of labor and/or consultation fees.
- Change management: Whether you hire a third party or use an internal team for the planning, you should still appoint a project team to handle change procedures in the company. This team is responsible for managing ERP implementation from an internal perspective. They will focus on ensuring that current company processes are compatible with the ERP system, conducting necessary trainings and identifying adjustments that must be made.
*It’s important not to underestimate the value of change managers. The process issues they can catch and fix before implementation would otherwise lead to costly post-implementation delays. Such delays are difficult to calculate and factor into your budget, and they can greatly offset your return on investment.
- Training: You will need to train your employees to work with the new system and its processes, programs and tools so that they’re ready to work it once implemented
- Extra coverage: While your change managers, trainers and trainees are planning for—and learning to use—the incoming ERP solution, you may need to bring on added staff to cover their existing roles and duties temporarily
- Execution: While the above activities are part of the implementation, the actual migration to the ERP system and execution of your strategy involves further human effort and time. The system must be installed and configured, then rigorously tested and adjusted until it all capabilities are optimal
Continual expenses: Maintenance, training and fees
Your budgeting shouldn’t end the day you launch your ERP. After implementation, there will be continuing expenses. Some are dependent on the type of system you have; others apply to both.
- Licensing: If you have perpetual licensing, you will have to pay for renewal. For subscriptions, you’ll have your monthly or annual payment. Note that subscription payments can change according to your needs throughout the year as they run on a pay-by-use model.
- Maintenance: On-premise systems will require ongoing maintenance, which entails labor costs and the cost of any necessary upgrades, repairs or replacements.
- Upgrades: You will need to pay to install upgrades for your on-premise ERP.
- Training: It’s unlikely that you covered every aspect of training to perfection before implementation. Expect to continue with trainings afterwards as your employees become more familiar with the system and grow their skills using it. Also, expect to train if you add more applications down the road or if a significant software upgrade occurs.
With this ERP implementation cost breakdown, you can start to build out each expense and get a better sense of the budget you’ll need. A thorough budget that accounts for every possibility will minimize surprises and sacrifices down the road.
To see how software pricing works in action, you can browse the Microsoft Dynamics 365 pricing guide. You can also use the Azure Pricing Calculator to build an estimate with the modules and apps you’re considering.