| Something that is borne out in every survey of | | | | processes. |
| those who have implemented an ERP system, or | | | | System communications |
| those who are contemplating doing it, is that the | | | | One area often neglected by many organisations is |
| three most important concerns are functionality, | | | | the significant disparities between different vendors |
| ease-of-use and total cost of ownership. | | | | when it comes to the efficiency with which their |
| Functionality and ease-of-use are both purely | | | | systems manage data behind the scene, i.e. the |
| technological issues that rely on a proper | | | | speed with which information is processed and |
| understanding of your requirements and how well the | | | | transmitted around the organisation.As surprising as it |
| system or systems under consideration comply with | | | | might sound, there can be a cost difference of 5-7 |
| and, hopefully, anticipate those needs. Total cost of | | | | times between vendors for exactly the same |
| ownership, on the other hand, extends well beyond | | | | transaction. Multiply that over the system's lifetime |
| the IT/user arena, into wider operations, finance, | | | | and then by the number of users in an organisation |
| management, and even into sales and marketing as it | | | | and the figures mount up. |
| can impact on profitability as well as efficiency. There | | | | Additional or specialised staff |
| are cases where a disastrous IT implementation has | | | | Implementing a new system can mean new recruits |
| taken down the whole organisation, or at the very | | | | in your IT department, such as database |
| least severely damaged it, so you had better get | | | | administrators or systems analysts or additional |
| your numbers right from the outset. The emphasis | | | | training of existing personnel. This has obvious salary |
| should always be on the "total" cost, and this figure | | | | and employment costs, particularly as, in a |
| can be sliced and diced a number of different ways. | | | | competitive global environment, specialists are in high |
| Firstly, the upfront or project costs are those costs | | | | demand and regularly headhunted and enticed away |
| related to the initial purchase & implementation. | | | | with better salary packages and career prospects. |
| They include: | | | | A key criterion in deciding which software vendor |
| - Software licensing & hardware costs, although | | | | you choose should include whether you can |
| these can be deferred though leasing or hosting | | | | implement your ERP system without having to |
| options. | | | | increase the number of technical staff. The |
| - Implementation costs contained in the supplier's | | | | implementation of new technology should be seen as |
| proposal. | | | | an opportunity to reduce the IT burden instead. |
| - Costs associated with any interfaces or system | | | | System upgrades and helpdesk support |
| modifications. | | | | This is probably the easiest cost to determine, |
| - Costs associated with data conversion from the | | | | because it is normally presented as an annual |
| legacy system. | | | | percentage of the vendor's software pricing list.One |
| Secondly, ongoing costs you will face during the | | | | thing to keep in mind is that you are normally much |
| system's lifecycle (and don't forget that this could | | | | better off if your support comes directly from the |
| extend up to a decade). These are: | | | | software vendor - agents do not qualify as part of |
| - Leasing or hosting costs depending on the method | | | | the vendor's organisation. There are too many cases |
| of initial purchase. | | | | where support has been outsourced offshore, with |
| - All costs associated with system communications. | | | | the service quality suffering accordingly.Aberdeen |
| - Costs associated with employing additional or | | | | points out that, very often, "the ratio of services to |
| specialised staff. | | | | software costs is indicative of both ease of use and |
| - Annual costs for system upgrades and helpline | | | | ease of implementation". |
| support. | | | | Users and modules |
| These costs are influenced by a number of factors, | | | | It is a corollary of software implementation that, the |
| including: | | | | larger the organisation the more users you have, and |
| - Number of users and | | | | that means the total cost of software and services |
| - Amount of functionality implemented (i.e. number of | | | | will rise as well. However, it is not always a linear |
| modules). | | | | increase.Surveys by Aberdeen of medium and |
| Finally and most importantly, there are business | | | | large-sized ERP users shows that average |
| benefits achieved, which should be incorporated into | | | | maintenance cost per user might actually drop when |
| the cost equation as a positive, as they are | | | | you reach certain economies of scale, thanks to |
| influenced by functionality (and whether and how well | | | | potential volume discounts. The number of modules |
| you use it), ease-of-use and efficient and effective | | | | implemented will also impact on TCO, since the more |
| upgrades and customisation. These potentially include: | | | | extensive the implementation, the more services |
| - Improved delivery performance percent on-time | | | | may be required. Of course, the larger you are, and |
| and complete shipments | | | | the larger the deal, the more bargaining power you |
| - Improved back-office efficiency due to order | | | | may have over the TCO. But again Aberdeen warns |
| processing automation | | | | that "with rising costs and weakening economies, we |
| - Reduced order lead time | | | | see evidence that cost savings are becoming harder |
| - Reduced levels of inventory | | | | to produce". |
| - Fewer number of days needed to close a month | | | | Ongoing business benefits |
| - Reduction in administrative costs | | | | While later articles in this series cover in greater detail |
| Immediate cost issues | | | | the potential business benefits you can achieve on an |
| The five immediate cost issues mentioned above can | | | | ongoing basis through an ERP system, in summary it |
| be dealt with through a variation of mechanisms. | | | | is fair to say that, when implementing a new ERP |
| Software and implementation costs | | | | system, you have a great opportunity to improve |
| You should firstly avoid any ambiguity when | | | | business processes. So it is important to not just |
| communicating the specific requirements of your | | | | simply re-implement existing processes. Not only may |
| business. You should ensure that potential vendors | | | | you may be able to save costs during |
| are given every opportunity to understand your | | | | implementation, but also achieve significant benefits |
| business processes and needs as well as you do. It | | | | from an improved business process on an on-going |
| also means avoiding big unknowns such as | | | | basis. |
| conversion, customisation and integration - activities | | | | Aberdeen research has shown that those |
| for which vendors can legitimately say they are | | | | organisations which pay the closest attention to the |
| unable to give you a fixed cost. | | | | ROI of a project reap far more rewards. "Yet few |
| You should also be aiming for, at least, a 5 to 10 | | | | demonstrate the discipline to closely monitor this level |
| years relationship with your vendor. A 2007 | | | | of payback and performance....While TCO has proven |
| benchmark report on a survey by the Aberdeen | | | | to be a significant factor in software selection, it is |
| Group on ERP in manufacturing found "the average | | | | important to keep both costs and benefits in mind |
| age of implementations to be almost nine years, | | | | throughout the life of an ERP implementation and |
| implying the longevity of these solutions often | | | | beyond". |
| exceeds the anticipated life". | | | | Whether you are an IT or operations manager, or a |
| With software and implementation, there is the | | | | C-level executive, it is vital that you consider all |
| opportunity of seeking a fixed price proposal, where | | | | elements that comprise ERP solutions' TCO. In |
| the software vendor contractually accepts some of | | | | addition to evaluating whether the ERP system fits |
| the risks associated with your system | | | | your business requirements, you need to consider |
| implementation. | | | | what the ongoing costs will be in the long run. If not |
| Interface customisations and system modifications | | | | careful, these may add up to significantly more than |
| Wherever possible, you should try to avoid any | | | | the initial capital outlay for the software and user |
| modifications or customisations. Modifications in | | | | licences. |
| particular should be avoided at all costs unless they | | | | In simple terms, you need to table a comparison of |
| are absolutely 'show stoppers' or business critical. This | | | | all of these cost elements for your preferred supplier |
| is particularly because modifications often prevent | | | | and their competitors. What you will glean from this |
| upgrades from being applied and you will be stuck | | | | exercise is a clear insight into the true life-cycle costs |
| with outdated versions of the software.This is not as | | | | associated with running an ERP system and a much |
| easy as it sounds, though. Aberdeen reports that | | | | better perspective on your ROI. |
| only 11 per cent of respondents to its survey of | | | | The next article in this series will look at "7 Essential |
| organisations undergoing ERP implementations had | | | | Criteria For Selecting Your ERP Solution & |
| zero customisation. | | | | Technology Partner". |
| "If your business processes were developed over | | | | References: |
| time - in an unstructured way - the possibility exists | | | | - IBS Australia, "5 things you should know about total |
| that no ERP system will match exactly". However, it | | | | cost of ownership (TCO) for ERP systems", IBS |
| agrees that, while some customisation of software | | | | Australia, March 2008 |
| may be necessary, doing so does add expense and | | | | - Jutras, C., "The total cost of ERP ownership in |
| effort to the initial implementation and the complexity | | | | mid-size companies", Aberdeen Group, July 2007 |
| of future upgrades. Rather it recommends you | | | | - Jutras, C., and Barnett, R., "The total cost of ERP |
| search out ERP solution providers with customers in | | | | ownership in large companies", Aberdeen Group, July |
| your industry, evaluate the fit, and balance the need | | | | 2008 |
| to adapt your business processes to conform with | | | | - Jutras, C., Trost, J., and Dalle Tezze, H. |
| the software against aligning the software to your | | | | |