The definitive guide to ERP implementation costs
February 8, 2024
- Case studies
ERP implementation cost factors
The following factors impact the final ERP implementation cost:
- Functionality – the more capabilities and functional modules you implement, the more expensive the ERP implementation is.
- Customizations – most ERP vendors charge extra for modules not included in the core price, industry-specific features, and advanced functionality; so many companies with specific workflows opt for custom ERP development as a more cost-efficient option.
- The number of ERP users – many vendors charge per user, so the more people use an ERP, the more expensive it gets.
- Transactional volume – typically increases with the user count and is dictated by business size.
- Integration scope and integration approaches.
- User training – some vendors offer essential training services for free, but customized ERP training on-site comes with additional costs.
- Organizational structure and geographic footprint.
- In-house IT specialists’ expertise and availability to assist with ERP implementation.
- ERP implementation partner’s experience and implementation methodology.
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5 types of ERP implementation costs
Here are key aspects to factor in during ERP planning, grouped into direct, ongoing, and hidden costs.
Software licensing costs
If you choose an off-the-shelf ERP platform, an ERP software license is an essential budget item. ERP software vendors traditionally offer two pricing models: perpetual and subscription-based. To decide between the two options, you can audit your existing infrastructure and security requirements and estimate the possible growth rate of your user base and transactional volumes.
A company pays a one-time upfront fee to access the ERP platform.
A company pays monthly or yearly for accessing the ERP software.
The fee can be based on the functional scope, system configuration/customization, and the number of users. The price doesn’t include recurring costs like maintenance, support, and upgrades.
The fee depends on the functional scope, system configuration/customization, and the number of users or resources consumed. The price includes maintenance, support, and upgrade costs.
Straightforward total cost of ownership No ongoing subscription costs Potential TCO reduction in the long run
Cheaper to start Access from anywhere/anytime by default Greater flexibility and scalability
Large upfront investments Unavailable across different geographical locations Scaling requires further infrastructure upgrades
Ongoing subscription costs can outweigh the cost of the perpetual license, especially for larger businesses Complex cost management due to potential spikes in demand Vendor lock-in
On-premises deployments Larger companies with sufficient infrastructure to support the ERP software
Cloud deployments Smaller businesses aiming to grow and be flexible
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ERP implementation ROI
ERP projects require heavy investments. To ensure they are worthwhile and justify them to the decision-makers, you must carefully consider how your business can benefit from implementing ERP. Here are some of the main ways ERP can bring a return on investment:
Improved employee productivity & organizational efficiency
due to routine tasks automation, duplicate work reduction, and creation of a single source of truth.
Increased employee engagement & retention
due to freeing them up from mundane data-handling tasks.
Reduced inventory carrying costs
and minimized stock-outs due to increased supply chain visibility and supply and demand balancing.
Faster & smarter decision-making
due to better data capture and analysis, fewer human errors, and reduced delays caused by slow, siloed, and outdated systems.
Enhanced customer satisfaction rates
due to the availability of 360-degree customer data, which helps deliver omnichannel customer experience, targeted and personalized support, faster response times, improved order accuracy, and smoother deliveries.
Minimized risk of administrative fines & penalties
for regulatory non-compliance due to a centralized approach to data security and governance.
Easier data search
due to enhanced communication and collaboration between departments across geography and time zones.
Reduced cybersecurity risks
due to the protection of most sensitive data from unauthorized access with comprehensive data security mechanisms.
Scheme title: Organizations that realized expected benefits (percent of respondents)
Data source: Panorama Consulting Group — The 2022 ERP Report
5 tips to reduce ERP implementation costs
Here are some proven tips to help you save money on ERP implementation without undermining the solution’s value:
1 Negotiate software licenses
ERP vendors' licensing and pricing have become increasingly complicated and differ from vendor to vendor. Thus, thorough platform research, a flexible negotiation strategy, and a skilled negotiation team are a must to reach optimal software agreements. When working with ERP vendors for the first time, we recommend turning to professional ERP consultancy or hiring a trustworthy ERP implementation partner to help you decide whether a longer-term commitment in exchange for better ERP pricing is a good option.
2 Be meticulous about large cloud contracts
Many companies choose cloud ERP software for its low entrance fee, believing that long-term commitments will save them money. However, even though cloud ERP providers take care of software maintenance, the reality is that you can spend more on annual fees than on an on-premises ERP solution, especially if you have a large user base and huge transaction volumes.
3 Rationalize the use of external resources
Ensure your ERP implementation partner does not overstaff the ERP project. To avoid overprovisioning human resources, look for maximum accountability and transparency as well as focus on comprehensive project planning and timely delivery of project documentation.
4 Avoid excessive customization
Be mindful of your company's requirements and avoid unnecessary customizations. You can opt for packaged ERP software if it covers 80% or more of your functional scope. Firstly, customizations of most off-the-shelf solutions are relatively pricey and can result in cost overruns. Secondly, customized software might not get updates from the vendor since each release would require a change in the custom code.
5 Draw up the ERP feature set
ERP scope expenditure and uncertainty are critical reasons behind ERP project budget overruns. To avoid paying more for the functionality you don’t need, you have to carefully plan key ERP features based on your budget and key requirements. First, focus on the most immediate business needs and then consider additional functionality. Finally, when drawing up the functionality scope, try to remain flexible about accommodating business growth.
Budget your ERP project with expert help
Pricing is an essential factor for any business investing in an ERP solution, and in this guide, we have covered all the critical aspects to help you set realistic ERP budget expectations. To get a more accurate evaluation, you can turn to Itransition. Our ERP experts will analyze your business case, come up with a relevant ERP software implementation scope, estimate needed efforts and resources, and prove the ERP initiative is worth investing your time and money in.
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