Cost of ERP software: direct and indirect costs

The cost of ERP software includes all direct and indirect costs incurred, from purchasing the software until the implementation process is completely complete. Some costs are clearly evident in this process, while others are silent or hidden. Generally, an incomplete analysis of the cost of ERP would only include the expenses to realize in the purchase of software and hardware, whereas the total cost of ownership of ERP goes well beyond these.

A survey conducted in 2002 estimated that an ERP implementation at an average cost of $ 15 million ranging from $ 0.5 million to $ 300 million, but it is a fairly old estimate, times have changed a lot since then and surely there would be a significant change in the average cost of implementation. However, the factors that affect the cost have not changed and more or less remain the same as in the beginning. The cost of purchasing the software and the cost of installing the hardware necessary to run the ERP are two basic cost centers related to ERP ownership. In addition to the purchase cost, the cost involved in getting the system up and running in the form of labor, system software, purchase of software for third-party intrusion checking and security functions, renewal fees of licenses, etc.

The implementation process involves many activities and these days it is preferred that most of them be carried out with the help of external consultants, such as the functional analysis of the company to prepare the document “as is”. Similarly, for technical analysis and BPA analysis the services of experts or agencies are used to obtain the best result and an independent opinion. These services generate costs and increase the total cost of ownership of the ERP. Indirect costs in these activities are those man hours that have been invested by internal staff to perform these activities, these costs are ignored most of the time, but they have a crucial impact on the total cost of ERP implementation.

To provide sufficient training, companies need to spend a decent amount of money first in hiring trainers or paying consultants who provide training to handle ERP, hire technical staff to support ERP, and train them according to the software and hire or develop existing managers like ERP. consultants for future needs. All of these add up to the total cost of the ERP software.

The cost of the tools and software required for integration with external entities, for optimal utilization of the ERP, and for integration with the current system also costs, and these costs vary depending on the scope of the implementation and the ERP software itself. Some ERP software may need many of these tools and software, and others may not.

Data conversion is another activity that involves a cost depending on the nature of the ERP and the format and medium in which the old data has been stored. The true cost of data conversion can only be accessed by putting all of these factors together and can be quite high at times. Testing its components, performance, and user acceptance of the ERP is a required process that must be performed prior to commissioning and this activity also incurs a cost to the business to increase the total cost of ownership of the ERP. Some companies may spend more money on a process and others may spend less, but to calculate the true and realistic cost of ERP ownership, you need to include all of these cost centers.

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