So you’ve decided you need a new financials /ERP business system to support your business. What is the total cost of ownership (TCO)? How much is it going to cost you? What are the upfront costs? Are there any recurring fees? How much budget should I allocate for internal costs? Should I consider on-premise or in the cloud deployments?
Okay, so the short answer is “how long is a piece of string?”
In this blog we’ll take a look at some fundamentals that affect the pricing of an ERP/ financials deployment, with a focus on on-premise deployments.
With business applications, costs are generally divided into six categories:
- software licenses
- externally provided services or consulting costs (implementation)
- ongoing software maintenance costs
- externally provided services or consulting costs (ongoing upkeep)
- infrastructure / hardware or supporting costs
- internal resource / people costs
There is potentially a seventh category, opportunity costs, ie the cost of not proceeding with a new system. This is a less tangible cost and not the focus of this blog, but is a worthwhile category to consider when constructing a business plan or a return on investment (ROI) position.
Costs vary enormously but the following rule of thumb ratios may help:
Initial software to maintenance costs approx. 5:1
Initial software to implementation services approx. 1:3*
* This ratio used to be closer to 1:1, however software license costs have dropped over the years.
In this example, if the software costs $20,000, maintenance would be approximately $4,000 and services would be approximately $60,000.
Now it starts to get tricky. In trying to estimate ongoing services (external consulting) and infrastructure costs the variables which affect these costs can vary enormously.
The use of ongoing consulting services is dependent upon two main factors: a) the capability and capacity of your internal team; and b) the degree of change (internal or external) of your environment. It is human nature to over-estimate our abilities and underestimate impact of change. When setting budgets, my advice is to err on the side of caution.
If we look at the infrastructure costs, again these need to be put in the context of each organisation’s present capacity and requirements. Think of the scenario where we want to renovate our home. Contrast the following scenarios:
- a hands-on DIY expert living in a modest three-bedroom house on a level block who simply wants to bolt on a fourth bedroom, versus
- an office-bound non-DIY couple, who own a large sprawling home on a steep slope overlooking the water, would like a fourth bedroom that is connected by a glass walkway to the main building and overlooks the pool.
In that light, consider these infrastructure scenarios:
- You already have a fully virtualised environment with available capacity for the new ERP system, but you don’t operate in-house IT staff to provision these servers. You therefore bring in external -consulting engineers to assist.
- You’ve selected your new ERP system, but have no existing hardware. You want the cheapest possible solution to support these systems in isolation from existing IT systems. You decided to deploy on a single physical server.
- You decided to upgrade your existing infrastructure and deploy a completely new, virtualised server environment to support the new ERP and a future business intelligence (BI) system along with other business systems. These other systems include a file server, exchange server, SharePoint, Citrix, etc. As part of the solution you’ve stipulated good performance and the ability to easily recover data as key requirements. You want a system that is ‘highly available’.
The aspect to recognise here, when considering total cost of ownership, is planning a budget based on what you have, what you want and what you need.
An often uncosted aspect of projects is the use of internal resources. Large projects will sometimes employ temporary staff to back-fill existing staff that can be released to work on the project. However, a more common situation arises where existing staff are simply asked to ‘squeeze’ the project into their current day-to-day operations. This juggling does happen, and by hook or by crook, the project does get done. Though the cost is counted in either long hours or other tasks that are foregone.
Lastly of course, an important aspect to consider in any IT project budget is a contingency. Perhaps a 10%- 15% buffer would seem reasonable. No matter how confident you are with your planning, unexpected events will arise. After all this is a project!
Whichever way you look at it, the main point to emphasis is this: producing a healthy budget upfront will give greater likelihood of success and avoid nasty surprises downstream. At the end of the day, there is no magic formula. But experience and insight does give us the ability to make informed decisions.
At Professional Advantage, we have helped thousands of customers navigate through all manner of project, large and small. If you have any questions about how to price a TCO budget for a new implementation of ERP (or CRM BI, SharePoint, infrastructure, business process management or corporate planning) please do not hesitate to contact us.
Blog written by Chris Pennington with Domenic Alvaro. The opinions expressed here are the personal opinions of the writer. Content published here does not necessarily represent the views and opinions of Professional Advantage Pty Ltd.