If you’re in the initial stages of the ERP evaluation process, you’re probably wondering, “What exactly is ERP software and how much is it going to cost my business?” This is a fair question, yet unfortunately there is no simple or precise way to answer it.
Estimating the total cost of an ERP software solution requires careful assessment of an array of variables which can vary wildly from one company to the next. The size of your businesses, your unique requirements and your scope of use all play a critical role in determining the cost of your system.
Understanding the factors that influence the cost of ERP will help give you a better idea of how much your business can expect to pay for an ERP startup. Moreover, it gives you the knowledge to carefully evaluate estimates that fall significantly below or above industry standards.
Here are a few of the key factors that influence the total cost of ERP manufacturing software.
Type of business and number of users
Most ERP systems are priced on a per-user basis. Specifically, the number of users that will be using the system at the same time and the level of access they require.
You can roughly expect to pay anywhere from $1,500 to $4,000 per concurrent user. The number of users and the functions which are included are factors that affect the price. For example, a small-to-medium-size job shop may not require a Master Production Scheduling module or sophisticated warehouse management, and a large multi-national company would probably require more financial management applications than a make-to-stock manufacturer.
Most robust ERP offerings have 30-45 applications and it is critical you assess your requirements so you do not purchase unneeded modules up front. An ERP supplier should be ready and willing to sell you what you need and when you need it. In addition, most ERP suppliers will consider the number of users purchased and provide volume discounts as the number increases.
Third-party software add-ins
Many ERP vendors integrate software from other companies to boost functionality or add value to their ERP systems. For example, ERP vendors offer third-party software add-ins which allow users to create customized documentation and reports, generate barcode labels and perform custom data extractions.
Because third-party products are usually designed by a specific vertical market, their functionality is often first-rate. You can expect third-party software licensing to be about 10-15% of the overall software cost.
Implementation costs are a significant consideration because you as the buyer can dramatically influence this expense.
First and foremost, carefully consider who will be supporting your implementation. Some ERP suppliers have their own implementation resources, others have 3rd party implementation consultants that they bring to you, and some just sell the software and leave you to find your own support. It is important that you speak with the person who you will be dealing with to ensure he or she has knowledge of your business processes, knows the software application, and is a good match with your company culture.
Implementation costs cover planning and organizing your project, training, prototyping functional areas of your business, installing the software, configuring the system, implementing process changes and completing conversions. Typically, an implementation to software cost ratio of .75:1 to 1:1 is considered a good planning goal but a ratio of 1.5:1 or 2:1 is not uncommon for more complex or customized ERP initiatives, especially if the implementation will cover multiple sites and/or companies.
You can significantly reduce your out of pocket implementation costs by staffing and supporting the project with your own internal project manager and a core team of functional area representatives that work with the ERP consultants and assume some of the tasks such as business process development and training the end users.
Maintenance (for On-Premise)
Unless you’re considering purchasing a cloud-based ERP solution, most systems will require ongoing maintenance.
Maintenance with on-premise ERP software is extremely important. You need your product working properly and constantly up-to-date. Costs associated with ongoing maintenance include any additional hardware needed, network fees, IT labor costs, and any other departmental costs to ensure your enterprise solution is in perfect shape.
Initial and Continuing Training
When you talk about enterprise resource planning and overall cost, you must talk about training.
Utilizing ERP software can be a learning curve, especially for those who are unfamiliar with utilizing an enterprise solution, or those who aren’t as technologically-savvy as others. There are initial costs associated with training your employees on in-depth tactics and ways in which to use the system. There’s also costs associated with continuing training, specifically on-site training when needed.
While it’s typically recommended for you to seek out these training resources when necessary, vendors will often offer free online resources as supplemental training materials. These free resources can be advantageous if you’re trying to learn more ERP skills while on a budget.
Implementation costs are one thing, but another major aspect of an enterprise resource planning software solution is customization. You want your new solution to work perfectly and uniquely for your business, and that usually requires some level of customization.
If out-of-the-box functionality isn’t enough for your ERP users, you may need to incur some expenses regarding developing a more customized product.
When new software releases of your enterprise resource planning solution are announced, you may want to consider upgrading. Software upgrades for any ERP system should be an expectation at some point down the line; the last thing you want is for your version of the solution to become obsolete.
When an intriguing upgrade becomes available, you’ll have to pay an upgrade fee. In addition, there may be additional hardware or software needed to ensure the upgrade runs as seamlessly as possible.
The Bottom Line?
Small-to-mid-sized businesses can expect the cost of software and services combined to range anywhere from $75,000 to $750,000. Certainly, a significant investment, but a properly implemented ERP system will pay for itself quickly.