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Implementing an ERP system, like most business ventures, plays out on a plane defined by three points: budget, time, and quality. Optimizing all three simultaneously is very difficult, but not impossible. From the perspective of the organization as a whole, however, financial issues prove to be the most important. They determine the size and functionality of the future ERP system and the time that can be devoted to refining the implementation.
Is it possible to minimize ERP implementation costs?
The lion’s share of an ERP implementation budget is the price of the system itself, which depends on the selected modules and functionality, seat licenses, and the remuneration of implementation teams on both the client and vendor sides. The total ERP implementation budget also includes the costs of purchasing the necessary IT infrastructure in the form of servers, storage, network devices, and licenses for databases and necessary development tools. On top of this, there are periodic fees for system service and maintenance. Of course, the final cost depends on the negotiation talents of those responsible for purchasing, but it must be remembered that the components of such a budget have varying price elasticity and not all expenses can be planned in advance. Therefore, implementation costs can be minimized through good planning and avoiding unnecessary risks. Besides, a large budget does not provide any guarantees – 75% of implementations end in some degree of failure, and 54% of projects exceed their original financial framework[i] . It is all the more worthwhile to reduce costs where possible and plan everything well in advance, not just for current, but also for future business needs. You also need to be aware that a reliable ERP implementation realistically takes about 15 months.
What is the best way to minimize ERP implementation costs?
The most obvious and simple way to reduce ERP implementation costs is to choose a solution appropriate to the scale of operations, industry, and business plans of the company. Contrary to appearances, this is a difficult and time-consuming task, taking from 4 to 6 months. Already at the initial selection stage, you need to make the right choices – if a company wants to expand in Europe, open new production branches, or conduct intensive e-commerce sales in the next few years, it is not worth spending time analyzing systems without support for multiple currencies, languages, and the ability to adapt to diverse tax systems in future countries of operation. At this stage, comparisons and descriptions of ERP systems available on the market can prove helpful[ii]. During the selection procedure, it is worth defining the key processes that the company cares about most and asking for a demonstration of how they are implemented in the analyzed system. This will allow you to narrow the field of search to a maximum of five vendors and save a lot of valuable time. With the very similar functionality of many ERP systems, references, especially industry-specific ones, often have a decisive significance. However, few people check whether the members of the team from such a reference implementation still work for the system vendor. The lack of such key employees can cost dearly – an average system implemented by an experienced and efficient team will bring more benefits than even the best solution implemented long and passionately by novices. In the knowledge, and above all in the experience of consultants, lie huge reserves of time and money savings. The final stages of the selection procedure will long cast their shadow on the possibilities of optimizing ERP implementation costs. It is therefore worth reserving enough time for analysis and comparison of fees, negotiation of contract content, and the scope of post-implementation service. Knowledge costs money. If the competencies of the vendor’s consultants are truly high, it is not worth holding too rigidly to competitors’ price levels during negotiations. Higher hourly rates will certainly be compensated by a smaller number of necessary working hours. The costs of implementing an ERP IT system can be effectively and significantly minimized provided that you also remember about non-obvious but significant cost-generating factors: the quality of historical data, business process modeling, and communication between implementation teams. Here, a huge field opens up for your own employees. Properly prepared data conversion is one of the key factors for implementation success. The number of hours spent cleaning historical data, filling in gaps, and mapping to databases can consume a significant percentage of the budget. The same applies to process modeling – good preparation reduces the time-consuming nature of the implementation and increases the overall quality of project execution. At this point, it is worth remembering that flexibility and the ability to modify your own operational activities very often bring measurable benefits – the functionality of ERP systems is the result of many years of work and experience from hundreds of implementations. Perhaps a slightly different course of some processes will be good for the company? If not – then the costs of development work will certainly increase the implementation budget again. In any case, the implementation team must include a person who will have the competence to decide on changes in the company’s internal processes. Reducing the budget is also influenced by efficient communication, constant and smooth exchange of information, and mutual trust between the vendor and client teams. Regular meetings where progress is discussed, tasks are set for the next period, and potential threats are analyzed, as well as the general status of the project, are the basis for optimizing ERP implementation costs. Notes from such meetings are a valuable source of knowledge for everyone involved in the project – from key users to managers. The ability to communicate implementation goals and necessary changes translates into the commitment and quality of work of all employees – the pace of learning the new system and the quality of prototype system tests and final tests depend on their motivation. It is also worth remembering that minimizing ERP implementation costs is influenced by the simple rule of moving within a closed catalog of requirements during the process. Failure to follow this rule is a direct path to exceeding the budget and radically increasing the probability of failure of the entire venture. Nothing increases costs as much as the need to re-analyze processes or significantly modify work already done.
What can be given up when implementing an ERP?
Modern ERP systems have very rich functionality, many domain modules, and subsystems. This does not mean, however, that when deciding on a specific solution, we are obliged to implement full functionality – quite the contrary. In many areas, third-party systems will work better, e.g., HR and payroll, which by definition are better adapted to current regulations and customs. If production activity is key in the company and the functionality of the production planning and scheduling module in the selected system is at the highest level, then perhaps it is worth giving up an average transport management module and replacing it with a specialized third-party solution? Perhaps external time and attendance systems will prove to be better suited to current and future needs, while also being cheaper? It is not worth being a slave to one vendor. Thanks to extensive integration capabilities and numerous APIs, ERP systems offer the possibility of significant optimization of the costs of purchasing a complete solution. It is not worth paying for functionality that will not be used or will be used very sporadically. The Pareto principle also applies here – 20% of seemingly necessary programming modifications can consume 80% of the implementation budget. Practice often shows that seemingly necessary processes can be handled slightly differently, and after not too long a time, the pressure for changes in the system somehow disappears. Well – habit is second nature to man.
How to price an ERP system implementation?
Whether something is cheap or expensive is a very relative thing. The simplest way would be to negotiate ERP implementation costs as a percentage of additional financial benefits, but such a simplified and one-dimensional approach does not work in practice. It is difficult to calculate the correlation between rising revenues and a specific ERP system – too many factors influence the final financial success. In manufacturing companies, after launching ERP software, production efficiency increases, machine downtime is shortened, and new products are introduced to the market much faster[iii], but whether this is solely due to the ERP system is not entirely clear. Generally, as a rule, it is assumed that an ERP implementation costs approximately 2% of a company’s annual revenue[iv]. Implementation costs are also influenced by the state of your own IT infrastructure, because vendors differentiate their prices depending on the model in which ERP functionality is provided – locally, in the client’s data center, or perhaps in the cloud as a SaaS (Software as a Service) service. In the first case, significant financial investments are usually spread over many projects and business systems; the ERP system itself is not necessarily the largest item in the IT department’s budget. The second model allows you to pay only for the use of resources and the system itself, but without detailed analysis, it is difficult to make the right decision. Also cost-significant is the initial decision of whether the company chooses an Open Source type system or decides to tie itself to one specific software manufacturer. Hidden costs also often appear, which can significantly affect the final cost summary – we are talking about employee overtime, the number of hours required for training, or a temporary decrease in productivity at the moment of launching a new ERP system. Realistic planning and assuming an appropriate margin of error will save many disappointments and troubles with an exceeded budget.
When is it not worth minimizing ERP implementation costs?
There is probably no situation in which it is not worth minimizing ERP implementation costs, but there are areas where you cannot save money. These include, above all, the remuneration of specialists and consultants – the measurable value of their work many times exceeds the remuneration they receive – investing in people always pays off. You must not skimp on data security – ultimately, maintaining constant and uninterrupted access to data determines business continuity. Also, system testing and continuous user training should not be a place to look for radical savings – otherwise, you will have to pay much more than for the time spent on repeatedly checking ERP operation or improving skills in using individual functions. [i] https://www.billtrust.com/resources/blog/5-famous-erp-myths-shattered/ [ii] https://www.raport-erp.pl/ [iii] https://profitfromerp.com/ [iv] https://www.erp-view.pl/rynek-it/29678-jak-wycenic-system-erp-i-przygotowac-sie-do-wdrozenia.html
