An enterprise resource planning (ERP) system obtains and structures transactional data, helping to coordinate the company’s resources and producing real-time operational data. It can drive your company’s success and growth by streamlining processes and consolidating data from disparate functions to provide a single, accurate version of the truth. With this information, leadership can more effectively manage operations and optimise decisions.
“ERP systems offer strategic and quantifiable benefits,” says Justin May, Managing Director of Truskey Consulting, which helps organisations leverage technology to maximise efficiencies, cut costs, and drive new revenue opportunities. May says ERP solutions can help companies successfully move into new markets, launching new products and services more efficiently. “The ERP system should help to enable the Business Strategy,” he adds.
At the same time, few organisations can invest in an ERP system without considering the question: what should we expect as an ERP price? To be sure, it’s difficult to state a single number, as multiple factors will influence the costs associated with implementing and operating an ERP solution. These include the size and complexity of your organisation, and the degree of support and customisation (if any) required.
Once you have a handle on both the initial and ongoing costs, you’ll likely need to show other leaders in your organisation how an ERP solution can generate a solid financial return and thus, merits the capital investment required.
Factors that affect ERP cost
Among the factors that impact the ultimate cost of an ERP implementation, these tend to be the most common and significant:
Some ERP vendors charge based on the number of users. As a result, your costs generally increase as your organisation expands.
As with size, greater complexity tends to boost costs. For instance, organisations that operate in multiple countries and transact in different currencies tend to incur a higher cost than those with only domestic operations. Some ERP vendors charge by legal entity, May says. “For those ERP solutions that have this approach to licensing and deployment, the greater the number of entities that will be implementing the solution, the higher the cost,” he adds.
As you might expect, greater customisation often drives up the price of an ERP solution, as it tends to increase the time and resources required for development and implementation. “To complete some customisations, it may be necessary tohave the deployment partner to develop these customisations or else to bring in consultants to your own organisation, adding more costs,” says May. Ideally, any customisation will be minimal, May says. Not only do customisations increase costs, but they can result in systems that are difficult to upgrade.
“ERP systems are now more focused on personalisation rather than customisation,” adds May. “This helps to reduce complexity and time to deploy.”
For the past seven or eight years, most ERP implementations have been cloud-based or software-as-a-service (SaaS) solutions, May says. The shift from on-premise solutions, in which a company hosts and manages the system, has been driven by the greater security and lower initial costs that tend to accompany most cloud solutions. In addition, most cloud-based or Saas solutions can be recorded as operating expenses, while investments in on-premise solutions are capitalised. Deploying an ERP solution on-premise typically comes with an initially higher price tag than a SaaS solution. However, this cost difference can change over time, as organisations that choose cloud-based implementations continue to pay subscription fees.
Solid, thorough training of all employees who will interact with the ERP solution will be critical to its success. Many vendors include some level of training in their rates, although it may be limited to online tutorials and similar options. Others may price it separately. Depending on the depth of the training offered by your vendor, you’ll want to assess whether to engage a consulting team that can offer on-site, personalised instruction. May adds that if the project is approached through the lens of business change management, then this would include “an assessment of the training needs and training strategy for your organisation as part of the ERP deployment”.
Data integration and conversion
The greater and more complex the data integration and migration required, the more the ERP solution generally will cost.
What is the cost of an ERP system?
The 2022 ERP Report by Software Path surveyed over 1,300 active ERP software selection projects, predominantly in North America but also in international markets including the UK. Based on this sampling, the report found the average cost to be USD $9,000 (£7,400) per user. Smaller companies tended to spend about USD $8,600 (£7,100) per user, while larger companies spend about USD $11,000 (£9,100) per user.
In May’s experience, smaller companies generally spend about USD $120,000 (£99,000) to implement an ERP solution, and then between USD $30,000 (£25,000) to $40,000 (£33,000) annually in ongoing maintenance and support costs. For a medium-sized company, the implementation costs tend to be around USD $500,000 (£410,000), and then several hundred thousand dollars in annual costs. And many larger companies can expect to invest millions in their ERP solutions, he adds.
The following steps and questions can help you estimate the investment required to implement an ERP solution:
Understand ERP pricing models
ERP pricing models fall roughly into two buckets. With cloud-based solutions, you generally don’t need to invest in the physical IT infrastructure required to host the system, but you’ll typically pay ongoing subscription fees. An on-premise deployment, in which your company hosts the solution on its computer systems, tends to require a higher upfront investment than cloud-based or SaaS solutions because you need the infrastructure in place.
What is the cost of ERP implementation?
To identify and aggregate the costs related to the ERP implementation, you’ll want to make sure to include not only the most visible costs for software and hardware, but the expenses that can be easier to overlook. These include the time of management and employees devoted to the implementation and training. In addition, it’s reasonable to anticipate a slight dip in productivity as employees learn the new system. If you need to rework internal processes, this will also impact productivity. As you review vendors’ pricing information, confirm what the amounts cover. For instance, what levels of support and training, are included? You’ll also want to include any costs for “bolt on” solutions needed to handle, such as Customer Relationship Management (CRM) systems or complex manufacturing scheduling requirements, May says.
What are the ongoing costs of ERP?
To estimate the ongoing costs of your ERP solution, as a starting point for most SaaS solutions, you’ll need to forecast the number and types of likely users within your organisation. This is because the charge for reporting and approval users tends to be less than that for power users who use the system on a day-to-day basis. Depending on the agreement with your vendor, you may need to budget for regular software upgrades, customer support, and/or maintenance. You also may need to allocate IT staff to manage the ERP solution, particularly if you host it on-site.
What is the total ERP price?
To find out the total price of an ERP system, calculate the estimated total cost of the ERP implementation and the ongoing operational costs.
How to gain budget for ERP adoption in 4 steps
For many companies, ERP solutions tend to require large, ongoing investments, so it’s likely that requests to implement one will be met with questions, scepticism, and push back. The following steps can help you address concerns and win support and resources.
Step 1 – Establish the need for an ERP system
Before you evaluate ERP solutions, gather input from across your organisation. Where are current processes working, and just as important, where are they unwieldy, inefficient, and leading to sub-optimal decisions? What data is not easily available? With this feedback, you’ll have a better handle on how an ERP system can address current bottlenecks and inefficiencies, as well as the information you’d like it to provide.
Step 2 – Take the cocktail party test
After you’ve considered the data you’ve collected, informally present your idea of implementing an ERP solution. It’s what this Harvard Business Review article refers to as “the cocktail party test.” Again, listen to feedback and questions, as this will help you identify and address weak points in your argument. The information also will help you identify the requirements you’ll look for in the ERP solution, as well as the benefits you expect the system to help you achieve.
Step 3 – Evaluate different ERP systems
Gather information from ERP vendors, and then gradually winnow the list of potential solutions to those that best meet the criteria you identified earlier and can most effectively help the company pursue its goals. It can be useful to score each solution, based on how well it meets your requirements.
Step 4 – Pitch your proposed ERP solution
Determine how best to present your findings to your colleagues. For executives, this often means a formal presentation at a board meeting. You’ll want to focus not just on cost, but on the expected benefits and return on investment, May says. Often, companies that implement ERP solutions are shifting from outdated, homegrown solutions that not only are inefficient, but fail to provide the accurate, timely information leadership needs to drive the business forward. Any pitch for a new ERP system must demonstrate their benefits – such as streamlining transactions and enhancing decision-making – and how this can enable organisations to identify new, lucrative opportunities.
For employees whose jobs will be impacted by the ERP, you’ll also want to show how the solution will eventually make their roles easier by reducing bottlenecks and manual processes. At the same time, you can acknowledge the changes that will be required to adapt to the new system and then highlight the training that will be available to aid in the transition. Gaining buy-in across the organisation will be key to the success of the deployment.
“ERP deployments are essentially a very significant business change management project requiring the management of all stakeholders, communication, job transition management, ensuring training effectiveness, and realising quantified benefits,” says May. “They should not be viewed as an IT or Technology project.”
May add that his preferred approach to securing budget and management buy-in for an ERP system would be a “structured selection project” where budget data and costs are provided by vendors as part of a Request for Information. This data is then further reviewed and updated “as scope is tied down later in the selection process”, he says.
Choosing and implementing an ERP solution is a significant undertaking. At the same time, ERP technology is essential to driving growth and success in many organisations. SystemsAccountants can help you review your business processes, identify the functions you’ll require from an ERP solution, and highlight the benefits you can expect. We can also help you make sure you have the right people in place to deliver a successful ERP implementation.