How to Lower the Total Cost of ERP Ownership
ERP is a valuable tool for improved performance and better financial management. Even with its benefits, the high cost of ERP causes many executives to question ROI and to explore ways in which to decrease their outlays. This is why more companies are considering the value of cloud applications. A frequently asked question about cloud ERP is just how much might be saved over on-premise solutions.
When determining cost savings, it’s important to explore the total cost of ERP ownership. The costs for ERP varies widely and scales with the size of the business. To break it down in such a way that a company could calculate their own potential savings, let’s consider how much of every $1 is spent for each component and service when implementing an ERP system.
Module Costs and User Licenses
The costs for a company will depend on the number of modules purchased and how many user licenses are needed. A generally accepted estimate is that ERP licensing (both user licenses and module fees) will cost about $3,000 per user.1 When comparing the ratio of licensing to maintenance fees and support, research indicates that for every $1 spent on implementing ERP, an average of 44 cents goes toward licensing.
Many midsize companies struggle to afford licensing for top-tier ERP solutions, regardless of whether it’s a cloud or on-premise application. For example, a high-tech company recently contacted us after discontinuing their services with the tier-1 cloud ERP product SAP BusinessOne. The problem they faced with their SAP BusinessOne implementation was that they realized midway through that they needed several more modules added to their basic package. When the costs for more connectors, licenses and monthly services were added to their basic price, the system became unaffordable. The company reached a point of frustration and abandoned their implementation. Not all cloud ERP solutions base their licensing on users and module fees, however; there are other pricing options out there and Trek Cloud ERP is an example. Learn more about Trek Cloud ERP pricing
Related article: Best Affordable ERP Systems for Distributors & Manufacturers
Maintenance fees for ERP systems are generally calculated as 16-25% of the cost of licensing.2 One of the main reasons companies pay maintenance fees is to obtain the latest releases and updates to their products. When considering all costs associated with ERP, maintenance is calculated to be an average of 12 cents of every dollar spent.
Maintenance fees can be reduced in a SaaS ERP if the vendor policy is to provide regular, scheduled updates to all opt-in clients. However, it is important to verify with your ERP vendor what constitutes an “upgrade,” and whether you will be charged when the software updates include additional functional features.
Implementing ERP is a complex task that requires both technical skills and project management experience. This is why most companies hire a consultant to provide support to their implementation. Services that fall into this category include ERP project planning, installation, configuration, data conversion, employee training, and go-live audit.
Support services are generally calculated at a 1:1 ratio with on-premise licensing costs.3 This ratio would place support services at 44 cents for every $1 spent on ERP implementation, and would provide a company with a basic implementation. Learn more about our support services
Evaluate Your Needs
The Trek Cloud team is happy to talk with you about your ERP needs and options for optimizing your return on investment. Contact us for more information.
More related articles:
1CA Magazine. What Does an ERP System Cost?
2Software Advice, Inc. The Buyer’s Corner: Negotiating ERP Maintenance Contracts.
3CTS Guides. Calculating Total Cost of Ownership (TCO): an Important Measurement of ROI.