One of the first things to do when investigating new software is to look at your budget and understand which options are available to you.
For example, the license fee usually does not reflect the cost of the solution, being only a fraction of the total cost. In this article, we will look into the true cost of an ERP/MRP software implementation for a small to a medium-sized manufacturer.
We are going to do this in 3 parts:
- Part 1. What are the different costs in ERP implementation?
- Part 2. How much does ERP implementation cost?
- Part 3. What is the maintenance cost of ERP?
Part 1. What are the different costs in ERP implementation?
There are direct and indirect costs that should be considered when adding up the numbers. If you haven’t taken part in business software implementation projects earlier, then these additional costs could possibly sneak up on you and be an unpleasant surprise. It is easy to think that it ends with writing a check for the software, however, in most cases, it is not so. Here’s a list of possible costs to investigate when planning an ERP implementation:
- Licensing fees:
- Software purchase
- User licenses
- Subscription fee
- Software maintenance fees:
- Annual maintenance
- Hardware related fees:
- Server purchase
- Server maintenance
- IT personnel
- Training and implementation fees:
- Business analysis and consultation
- Project management
- Custom development fees:
Clearly, the licencing fees are only the tip of the iceberg. All these costs, of course, vary greatly from provider to provider, and from solution to solution. To better understand how the cost differs in implementations of different ERP solutions, it is important to understand the what are the fundamental types of solutions offered. In general, there are three distinct historical groups of solutions.
First, big legacy ERP systems, which emerged in the 1970s, built for big companies and corporations, originally designed to work on mainframes. These systems are tailored for the company, which makes the implementation time notoriously long, from 6-18 months and longer.
Second, out-of-the-box ERP systems, which emerged in the 1980s as personal computers became popular, these systems can be installed without tailoring.
Third, postmodern ERP software which is offered as a service, hence the delivery model is called SaaS, Software-as-a-Service. This is a common trend in the 2010s thanks to widespread internet connectivity and decent speeds. Since the vendor manages everything from the software to hardware side of things, the customer only needs an internet connected device with a browser.
In the following table, we have brought out the cost structure of the main three trends in the industry, their key characteristics and how the costs build up in these different models.
|Big legacy ERP/MRP systems||Out-of-the-box ERP/MRP||Postmodern ERP/MRP
In conclusion, it is easy to see that the first solutions to have emerged are the most complex, and as time has progressed, more user-friendly solutions have come on offer. At the same time, the costs are being driven down as well – in the 1970s, a small-to-medium enterprise couldn’t afford and ERP/MRP system, yet today this is easily affordable for even a small manufacturer.
Part 2. How much does ERP implementation cost?
Clearly, in a traditional implementation, the software cost is only the tip of the iceberg. Typically, hardware accounts for about 20-30% and implementation services for about 30-50% of the total cost.
In general, software to additional costs ratio in the implementation of…
- …legacy ERP is 1 to 1.5+.
There’s a hardware cost, plus deep customization is always required which drives the price up, the projects are prone to drag out and go over the budget due to services;
- …out-of-the-box ERP is 1 to 1+.
There’s a hardware cost and even though these can be installed out of the box, for a commoner these solutions are complex and unintuitive, built on the 80s and 90s frameworks. Therefore, there’s still a lot of consultation and training required, which cannot be considered an optional fee in most cases;
- …postmodern ERP is 1 to 0+.
There is no installation required and the software is designed to be intuitive and effective by utilizing the latest software frameworks which people are accustomed to nowadays. Depending on the company, knowledge of ERP systems and previous experience, an implementation can be done autonomously without services.
In terms of manufacturing, the ERP/MRP software gives the greatest effect and timesaving in the everyday tasks of the office staff, the purchasers, salespeople, production managers, stock managers and others who need to process a lot of information. These licenses are most the important, the training will be the deepest, and the ERP system will create the most value in these hands. This central team for a small manufacturer may consist of 5-10 people, for a middle-sized company this is likely to be 15 and up.
When it comes to shop-floor workers who are in majority, their interfaces and touch points are vastly simpler – therefore the costs associated are comparably lower.
Here is the cost breakdown for a 15-user implementation. Due to different time-spans and the fact that it’s hard to tell when an implementation is truly finished, the best way to understand the implementation cost is to sum up the total costs in the 1st year.
Truly, this is just the baseline budget, a minimal package. This does account for additional consulting and training, customizations and integrations, which all become more likely as the company’s size grows.
Generally, for a legacy ERP in a manufacturing setup, one-time license fee for a user is around $4,000. For an out-of-the-box ERP, the ballpark figures range between $1,600 and $4,000. A SaaS ERP yearly subscription fee for one user is approximately in $400 to $900 range. [1-5]
For an out-of-the-box ERP, a budget office server with OS, a backup drive, security, and setup will cost at minimum $9,000. [6, 7]. A decent hardware solution with related items to run a Legacy ERP is costlier, for a setup like this you could expect to cash out $35,000 and more .
Services mainly consist of business analysis and consulting, software training and customization, project management and implementations. The more complex the software, and the more complex the company, the more services are required as it is more likely that the company is not able to pull the implementation off using its own resources. As out-of-the box systems need deep configuration, plus legacy systems are specifically tailored it is not possible to skip on these kinds of consulting services. The hourly rate of the services can be expected to be in the range of $100-$200.
Modern SaaS ERP solutions are built using a different approach, where complexity is being kept minimal while still being powerful. Moreover, as these solutions mostly do not position themselves to solve every single business problem, but focus on key areas very well, there is little-to-none configuration needed. This, in turn, lowers the need for services, depending on the situation it might happen that these are not needed at all, which makes it the most affordable solution.
Part 3. What is the maintenance cost of ERP?
We are not finished yet. The life-cycle of your ERP system does not stop with the implementation costs. To keep the system running, there are 3 things to look for.
Firstly, the ERP system needs maintenance, which is typically in the range of 15-20% of the license fees paid yearly [4, 8]. The percentage is smaller for legacy ERP solutions as the license fee is higher, and greater for out-of-the-box solutions as the license fee is lower. The maintenance fee is included in the SaaS subscription.
Secondly, the server needs maintenance, power, and its hardware needs to be replaced every 3-4 years. Regular hardware maintenance fees can easily be around $2,400 – $4,800, up to $10,000 a year, the electricity bill for a small server is about $500 a year. Thus, simply having the server do its thing costs over $3,000 a year, if it’s maintained properly. [7, 9, 10]
Thirdly, the employees need “maintenance”. The more complex the system is, the more difficult it is to prevent brain drain. Training is needed for on-boarding new workers and maintaining effective practices across the company.
Continuing the 15-user ERP/MRP example as in the previous part – considering software maintenance fees and hardware related costs, we get that the average yearly cost from the 2nd year for legacy ERP is the greatest, and it is in the same range for out-of-the-box and SaaS ERPs.
And finally, we have all the information we need to calculate the total cost of the ERP system. We can take into account all the implementation costs, from licensing to training, the running costs, from maintenance to hardware, and add up all the cost during the lifetime of the solution.
We get that naturally, legacy ERP systems are the costliest by far, out-of-the-box ERP comes second, and SaaS ERP is the most affordable. Even though SaaS ERP is a subscription service, the total cost over a long term period for premise-based solutions where licenses are bought one-time will still be far greater. Moreover, from the graph above, it is easy to see that the SaaS ERP has a very small entry barrier and the yearly maintenance fees are easily predictable.
It is not as straightforward as it might seem in the first place to calculate the cost of ERP implementation. The licensing fee is just a part of the cost, which holds true especially when implementing premise-based solutions, where additional costs are possibly half or even more of the total cost of the implementation. Yet, this does not hold true for SaaS solutions.
The yearly maintenance fee varies largely from solution to solution, it’s the greatest for a Legacy ERP and similar for out-of-the-box and SaaS solutions. It might be easy to overlook costs like hardware replacement and maintenance costs, one should even factor in the annual electricity bill, which will make a considerable difference when comparing premise-based and SaaS ERPs.
The cost analysis should only be concluded once the yearly running costs and the total cost of any solution you are looking at is clear. We’ve looked into the numbers of implementing three different types of ERP solutions. When comparing SaaS solutions to premise-based solutions, it is clear that SaaS solutions have a very low entry barrier. In part, due to this and the fact that there are no hardware and installation related fees, their cost is easiest to predict, and in the long run, it’s also clearly the lowest when factoring in additional fees.