It’s a nightmare to end up spending way too much than you set aside for your ERP software purchase. Unfortunately, 79% of organizations end up spending way more than expected during their ERP implementation.
However, if you have carefully prepared your budget considering everything important and with awareness of the process, we assure you that you can get the ERP for your organization within your budget. Here’s a small help with setting your ERP budget, so you can save time in researching.
When setting a budget for your ERP, our first advice is to be realistic with the numbers.
Do your own research and find out the average cost it will require to purchase an ERP for a company of your industry and size. Before anything, make sure your company is ready for this investment, so you don’t have to struggle with financials in the middle of the process.
An ERP system comes with a range of pricing. Thus it’s important that you do your homework right before your purchase not just to keep it within your budget but to get the best bang for your buck.
Mainly there are a few factors that affect the pricing of an ERP system.
Primary Factors Affecting ERP Pricing
- Hosting (cloud vs on premises) – Cloud-based systems cost will include monthly fees, and implementation costs, while on-premises systems’ cost divide between license, implementation, and maintenance. Although cloud-based options might seems to weigh less on your pocket, such systems will cost you more in the long run as subscriptions fee of such systems can increase tremendously annually.
- Functional requirements – Modules, functions, and features you need in your ERP system to meet the expectations.
- Data migration – The amount of data needed to be converted along with its complexity are two other factors that will affect the pricing of your ERP implementation.
- The number of users – Depending on the users, the hardware, software and other tools needed will be decided. Fewer the number of users lesser your cost will be.
- Customization and add-ons – Special modifications and development required in the standard system will cost you. So is service add-ons.
- Integration – If your organization haven’t a pre-defined integration work it will also add to your ERP budget.
- The company, business units, and geography – Do you have multiple companies in different locations? Do you have multiple business units with different requirements complexities?
Identify your requirement
At Tigernix we believe that every budgeting process should start with a well-defined requirement. When it comes to identifying your ERP needs, it’s important that you clarify what you are trying to achieve as an organization. Is it to improve your customer experience, to streamline your operations or to accommodate the requirements of the new venture you are planning to step into?
Here you can start with a team that represents each and every department, so you can easily identify what each department’s challenges and struggles are. This way it will be easy for the management to figure out the top requirements for the new ERP system.
Always having clear goals for your ERP project will help you keep your focus on what you really need leading you to avoid unnecessary expenses throughout the process.
Settle on what you really need
Once you list out the requirements of each department, it’s important that you filter everything to identify what your organization really needs. Because if you are not careful enough, you might end up getting features and functions you only rarely use.
Keep in mind that every small thing is going to cost you. Thus make sure only the top requirement is considered when finalizing the ERP system features needed.
Find the pricing model works for you
This is a critical decision you need to make that will affect not just your budget but also the performance of the system. What’s best for your company and budget may vary depending on the size of the company, industry you are in and in the volume and the complexity of the transactions involved.
Mainly there are two pricing models all the vendors offer.
1. The perpetual licensing model (on-premise system)
This is the traditional way of purchasing a software. In perpetual licensing, you can get the software license upfront with the purchase allowing you to use the ERP system indefinitely. Apart from license fee, with this model, you will experience one-off implementation service fee and a support contract fee that you will have to renew annually. Here the software will check the subscription against the subscription server once in a while and ensure that the contract is not expired. When you are reaching the renewal date you will be notified prior so you can pay up again to renew without experiencing any operation lags.
Advantages
- Well-defined ownership cost
- Fixed fee for use of license indefinitely
- May offer a lower total cost of ownership for larger businesses over time
Disadvantages
- Higher upfront costs for onsite infrastructure
- Since it requires infrastructure upgrades which can be expensive to scale up as the business grow.
- There will still be an annual contract fee
2. The SaaS subscription model (cloud-based system)
With a cloud-based system, you’ll be able to host the system in a cloud, owned by the vendor which you can access via the internet on user demand. For this model, you won’t need an infrastructure of your own which will save you money. Here your costs will include an ongoing subscription for the software license, support services, and new system updates. With a cloud-based system, the fee may vary depending on the number of users and transaction volume.
Advantages
- Subscription pricing will depend on the number of user and the transaction volumes without a fixed fee
- The upfront cost is considerably low
- Management costs for on-premise deployment are saved.
- Initial license cost will be low
Disadvantages
- Ongoing subscription costs
- Sudden spikes in demand can increase costs
Calculate costs
Once you identify your requirements, preferred model and vendors within your budget, it’s time to list out every expense involved with the process and calculate the cost for the whole project. To help you make sure you don’t miss any expense, below we’ve listed the main costing that should make it to the list.
- Component costs – From software, hardware, database, operating system, system validation (if your industry is regulated), interfaces, customizations, network to hosting everything comes under component cost. Here we recommend starting by surveying all your components and understanding what still can keep up with your new ERP system and what needs to go and then calculate the cost for new components needed.
- Installation costs – This can vary from vendor to vendor as well as whether it’s a cloud-based system or an on-premises system you are investing in. If it is an on-premises system you need to take into account if the infrastructure you already have can accommodate the new system and if it’s not, what it will cost to expand the infrastructure.
- Training costs – Having the skillset in-house will save you a lot in ERP training. However, if you are an organization that happens to be totally new to ERP software make sure you add training cost to your budget too.
- Ongoing costs – There will be annual subscription fees for services and maintenance and upgrade costs you will have to adhere from time to time or yearly.
- Contingency money – If something goes wrong, having some contingency money will save you the worry and panic.
Justifying costs
There can be many reasons an organization is planning to purchase an ERP system. Top reasons are to speed up the cash cycle, increasing productivity, improved business intelligence…etc.
However, when other business units are battling to get budgeting allocations, it’s paramount for you to justify your costs as well as the return in order to get the budget you want from the management. It’s important that you thoroughly justify the cost involved with the purchase with a well-defined ROI projection.
This phase is another chance for you to take another round of consideration to see if there are features that will not make that much of an impact in terms of financial ROI.
Below are 3 areas to look for ROI:
- Labour cost reductions
- Improved cash to order cycle
- Supply chain management
Set the final budget
Since you have given some thought to what you want in your ERP system and what not, now you can reach out to ERP vendors for quotes -which you can use to refine your ERP budget even further. Here our advice is always to be aware of the future costs involved and agility as well as the tangible benefits each feature can deliver your organization.
Also, we like you to remind that not to make the budget the only factor your purchase depends on, as it might hinder the goals you are trying to achieve with an ERP system in your organization.
