ENTERPRISE RESOURCE PLANNING EXECUTIVE GUIDE  

AN EXECUTIVE'S GUIDE TO ERP SOFTWARE SYSTEMS

TOTAL COST OF OWNERSHIP (TCO)
ERP application external costs typically include software procurement, hardware procurement, implementation services and annual software maintenance.

Software and hardware procurement are generally straightforward costs. These purchases are subject to significant discounting and it is incumbent on the buyer to verify all needed software is included in the originating transaction. Many a software buyer have learned after the purchase that a needed module, report writer, data conversion tool or other necessary component was missed in the original purchase. Once a buyer is invested in the vendor’s technology, procurement terms and discounts for add-on purchases are seldom as good as the original purchase.

Few organizations retain in-house ERP implementation skills. Therefore, when properly used, external consultants can deliver leadership, expertise, advice and specialized skills which provide significant value while reducing risk. While costs for external providers vary based on the particular provider and the scope of the implementation project, many analysts cite the 4 to 1 total cost to software cost rule when ball parking cost estimates – meaning that the total cost of ownership will be about 4 times the cost of the software. External implementation consultant services normally make up the biggest portion of the total cost. Software as a Service (SaaS) implementations typically require less external consulting as there is no local software installation so the beginning portions of the implementation are accelerated. Nonetheless, whether on-premise or hosted delivery, the core implementation requirements of process definitions, data conversion, software configuration, system integration, training and so on clearly apply.

Annual software maintenance is required by some ERP vendors and optional by others. Annual maintenance fees typically range from 18 percent to 30 percent of the software purchase price or the software retail price (even if a discount was granted). Software maintenance includes fixes, patches, performance enhancements, point releases and sometimes new version upgrades. Software maintenance is advised in order to keep the software stable and reliable.

SOFTWARE AS A SERVICE (SaaS) ERP
The introduction of software as a service (SaaS) ERP software systems brings with it the most dramatic change to the business software TCO equation in the last 25 years. SaaS business applications remove the up front capital expenditures for both hardware and software, achieve faster and less costly implementation periods, eliminate the majority of technical and IT labor support requirements, lessen or remove the material effort and investment required for new version upgrades and achieve expense predictability with negotiated subscription pricing.

SaaS ERP systems are currently the highest growth sector component within the ERP software industry and are generating the lions share of excitement and media attention. While SaaS ERP systems share many of the same risks and pitfalls as on-premise ERP applications, the change in delivery method (remotely hosted instead of locally installed), pricing model (subscription pricing instead of up front purchase) and support (outsourced support instead of internal IT resources) are clearly disruptive changes within the enterprise software industry.

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