How will your ERP system will be deployed?
How the ERP system is deployed significantly impacts the cost estimates. There are several options:
- On-premise (on-prem): On-premise deployment is the traditional way legacy ERP systems have been implemented for decades. The hardware and software are purchased and installed on a company’s own servers, and the system is maintained and upgraded by the company.
- Cloud: In a cloud deployment, the system runs over the internet with hardware and software typically owned and supported by a third-party provider. Businesses subscribe to the service – a licensing model referred to as software-as-a-service (SaaS) ERP.
- Hybrid: In this model, elements of on-premise deployment and cloud can be combined to create a hybrid cloud. This gives the company the ultimate flexibility but requires significantly more IT staff involvement.
Which deployment options will you compare?
Calculate the ERP cost of both systems
This section of the worksheet is designed to calculate the total cost of ownership (TCO) for both the existing ERP legacy system and the new replacement system. There are typically four areas of investment:
For the initial project justification, it will be necessary to estimate these costs (before you go out for proposals and quotes). Many or most of the items listed here may be included in a package quote but expect to pay for additional services, training, hardware, and software to complete the job.
Growth and support costs will be significantly higher if your existing system is old, not well supported by the developer, or if it is “down-level,” that is, not up to date with developer fixes and releases.
In addition to the initial costs, estimate the cost of upgrades and expansion beyond the initial purchase. Since this is a time-oriented estimate – all costs will be replicated (and escalated) through the five years (at least) of the lifecycle – place these upgrade and expansion costs in future years as it is unlikely that you will need to upgrade or expand during the first year or so.
- Initial hardware: Purchase or lease cost of the computers, servers, printers, for example. In the comparison table, this expense should have already been spent for “legacy system.”
- Ongoing upgrades and maintenance: Continued costs for above infrastructure. There will be no or low infrastructure maintenance costs with SaaS.
- System software license: Includes operating system, database, utilities, for example.
- System software upgrades and maintenance: Ongoing costs for above system software. Expect no or low infrastructure maintenance costs with SaaS.
- Networking equipment and fees: Initial budget for networking equipment and services.
- User devices: Cost to purchase, replace, and maintain the various PC’s, tablets, scanners, and so forth.
- Infrastructure facilities fees: Calculated costs for the space and utilities, for example, that the system requires.
Here, you will want to budget for the cost of upgrades and expansion beyond the initial purchase. The annual fees may rise over time as additional users or applications are added, depending on a supplier’s pricing strategy.
- Perpetual license fee initial cost: Upfront costs especially for on-premise plus some hosted and hybrid licensing options. This has already been spent for the legacy system.
- Perpetual license ongoing annual fee: This covers the updates and some level of support. For an ERP system, it is typically 16-20% of list price annually. At 20% yearly the license is “repurchased” every five years.
- Annual subscription (SaaS): Use quoted or estimated annual subscription costs for cloud applications.
- Annual maintenance fees (SaaS): Additional support fees that will be needed on the software that are not included elsewhere. Most SaaS software maintenance fees are included in the subscription.
Next you need to estimate the costs of implementing both the initial system and the planned upgrades over the five-year period. Most software suppliers have one or two major releases during a year. Each release is in fact a mini implementation. First, the project team must review the release to determine the overall impact to the current business process. Then the release is loaded and tested. Before going live, the users should be sufficiently trained on the new software. Potential costs to consider include:
- Staff project team: Factor in the budgeted time (including overtime) for IT staff and users.
- Consultancy fees: Determine the initial assistance you may need beyond what the supplier will be including.
- Data conversion, input, and testing: Use staff or temps for data entry, testing, or whatever other basic tasks you need covered. (This is often underbudgeted, which can lead to data quality issues.)
- User education and training: Some initial end user training will be included by the supplier, but to get the most of your system further education is highly recommended.
Estimate the “normal” operational costs for keeping your new ERP business system up and running. When considering on-going (recurring) costs, be as realistic as possible and include a reasonable expectation for escalation or inflation year-to-year. The major items will be a blend of internal IT staff and consultants’ time and expenses such as:
- Infrastructure support costs: This covers time budgeted for support beyond what the supplier’s recommendation included. With SaaS, there will be either no infrastructure maintenance costs or minimal costs.
- Backup and disaster recovery: Include outsourced or in-house practices.
- Network and devices support: Estimated support required for the network, PC’s, and mobile, for example.
- Periodic bug fixes: This is for IT staff to apply the stream of bug fixes.
- Software integrations: Expect to maintain regularly as software products are updated.
- Software customizations: Updated or reapplied in software release cycles.
- User’s mobile device support: Effort required for app development and support.
Determine the total cost of your legacy ERP vs new ERP system
From the four tables above, transfer the total for each area of investment, as well as the subtotals of the new system costs, to the table below. You will now be able to see the total savings or additional costs of going to a new system. Expect a mix of negative and positive subtotals for the “5-Year Difference.”
What to do with this information
- If the total “5-Year Difference” is positive, it means that it is more expensive to maintain your legacy system then to replace it. That amount is a direct benefit and needs to be added to Table 8: Summary of ERP Benefits (below).
- If the total “5-Year Difference” is negative, it means the new system will be more expensive to implement then to maintain your existing system. The additional benefits will be covered in the next section.
- The total of the New System’s 5-Year Costs will be used below in the ROI calculation as “the investment.”