ERP Software Cost – Direct And Indirect Costs

ERP software cost includes all the direct and indirect costs incurred, from purchasing the software till implementation process is completely over. Some costs are clearly evident in this process while some are silent or hidden. Generally an incomplete analysis of ERP cost would just include the expenses to be made in purchasing of software and hardware whereas total cost of ownership of ERP goes far beyond than just these.

By a survey conducted way back in 2002 it was estimated that an implementation of ERP on an average cost $15 Million ranging from $0.5 Million to $300 Million, but it is quite an old estimate, times have changed a lot since then and there surely would be major change in the average cost of implementation. However, the factors affecting the cost have not changed and more or less remains same as they were right at the beginning. The cost of purchasing the software and cost of installing the hardware necessary for running the ERP are two basic cost centers involved with ERP ownership. Apart from the purchasing cost the cost involved in making the system run in the form of manpower, system software, purchase of software for security features and checking third party intrusion, license renewal fees etc should also be taken into account.

Implementation process involves lots of activities and these days most of them are preferred to be done by taking help of external consultants like functional analysis of the company to prepare ‘as is’ document. Similarly, for technical analysis and GAP analysis services of experts or agencies are availed to get the best output and independent opinion. These services incur costs and increase total cost of ownership of the ERP. Indirect cost in these activities are those man hours which have been invested by the in-house staff for getting these activities done, these costs are ignored most of the times, but have crucial impact on total cost of ERP implementation.

To provide sufficient training, companies need to invest decent amount of money firstly in hiring trainers or paying the consultants imparting training to handle the ERP, hiring technical staff to support the ERP and training them according to the software and hiring or developing existing managers as ERP consultants for future needs. All of these add up to the total cost of ERP software.

Cost of tools and software required for integration with external entities, for optimum utilization of the ERP and for integration with present system also cost and these costs vary according to the scope of implementation and ERP software itself. Some ERP software may need lot of these tools and software and some may not.

Data conversion is another activity that involves cost depending upon the nature of the ERP and the format and media on which old data has been stored. Actual cost of data conversion can be accessed only by putting together all of these factors and sometimes it can be quite high. Testing of ERP its components, performance and user acceptance is a compulsory process which has to be conducted before going live and this activity also incurs cost on the company to increase total ownership cost of the ERP. Some companies may spend more money on one process and another may spend less but for calculating actual and realistic cost of ownership of ERP all of these cost centers are needed to be included.

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