Four factors that shape the cost of ERP

by Donald Burleson | Aug 16, 2001 7:00:00 AM

Tags: Donald Burleson

Takeaway: The cost of ERP is like the weather. Everyone complains about it, but no one does anything about it. But you can do some cost forecasting when you learn about four factors involved with staffing and ERP implementations.

You don’t have to be an expert to know that enterprise resource planning (ERP) is one of the most costly technology initiatives that an organization can implement. While it is very difficult to provide global costing guidelines, there are some important considerations that can help you estimate your total expense for implementing ERP. Here is an overview of four cost factors associated with staffing during an ERP implementation. These factors will likely weigh into your decision about whether you should purchase a packaged ERP system from a vendor or if you should custom build an ERP solution in-house.

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Second article in a series
This is the second article in a series on ERP and the factors you should consider when building or buying an ERP system for your organization. The first installment discussed the differences in packaged vs. custom ERP software.

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Plan for human costs
The costs of installation, implementation, and data migration generally run about three to four times the original cost of the packaged ERP software. For example, if your software costs $2 million, you can expect to pay an additional $6 million to $8 million for consulting services to get the system into production. TechRepublic members shared general cost information in a recent survey. (See Figure A.)


Consider remote consulting
If your organization is located in a major metropolitan area, you will likely have lower consulting costs. For example, an ERP project in South Dakota may cost double the rate of the same system developed in Los Angeles.

This factor is present because the rates are more stable and competitive in larger cities. Organizations located in smaller cities may have to pay their vendor for consulting services at a rate much higher than the market average. If your company is located in a smaller city or rural area, you may want to use off-site consulting and hire consultants who work from home.

Transition your IT staff
It’s interesting that a recent survey of TechRepublic members determined that end-user adoption of an ERP package was the greatest concern among IT professionals (see Figure B).


Analysts confirm that training end users is a significant expense. In a recent report on SAP end-user training, Gartner suggests that, at a minimum, enterprises should allocate 17 percent of the total cost of an ERP project to training. Gartner research also found that companies that budget less than 13 percent of their costs for training are three times more likely to see their ERP projects run over time and over budget when compared with companies that spend 17 percent or more on training.

But end users aren’t the only staff members who should concern you. Staff turnover among developers is common in organizations that are implementing an ERP solution. If you choose to purchase a packaged ERP solution, be prepared for staff turnover. In many cases, programmers will be excited to learn a new technology, while others are reluctant to embrace change. On the average, IT managers can expect to lose up to 40 percent of their IT staff, primarily those programmers who are unwilling or unable to master the new software.

Avoid the illusions of false savings
Many managers choose to purchase a prewritten ERP solution under the assumption that because the software is prewritten, they can downsize their IT staff. In reality, prewritten packages require IT personnel to locate bugs and apply patches to the packaged software. There are seldom any real human savings associated with adopting a prewritten ERP package. In practice, your IT staff will remain about the same size, with your old programmers being replaced with application specialists.

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ERP bargains during difficult economic times?
With the economic downturn, many organizations are postponing major IT initiatives. Is this the time to negotiate a bargain price from a leading ERP vendor? Share your thoughts below or send us an e-mail.

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Print/View all Posts Comments on this article

Consulting Costs?? jgagne@... | 08/22/01

I see 3-4 time software costs dba_guru | 09/11/01

Cost of ERP - A Project thing jsommerville@... | 01/21/02

ERP: Good In, Garbage Out psiebers | 09/11/01

negotiate a bargain price ? campbell@... | 10/30/01

Good Time for ERP deals? TAVio | 01/21/02

Business Disruption djellis@... | 01/21/02

ERP Pricier than you think nancy78729 | 01/21/02

ERP stabilization wai-shuen_lee@... | 10/05/02