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Cost of ERP Implementation

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Cost of ERP implementation depends on many constant and variable factors such as hardware, number of software license, implementation time, needed additional resources, add-on applications, training, consultancy, integration to other applications, testing, customization, implementation and future costs. The expense on hardware and license are direct as well as fixed costs but the expense on customization, training, business process reengineering, maintenance and implementation are indirect costs and it can vary from case to case.

Direct Costs

Initial cost of license and maintenance: The direct cost of ERP implementation includes the expense on hardware, operating systems, database license, number of modules, software license, third party software license, add- on software and integrations to third party. As the number of users increase - the TCO goes up. The expense depends on the technology and software selected by the vendor. For example: ERP designed on two tier architecture can cost anywhere between $3000 to $10,000 per user and the TCO can be around $600,000 or more.

Hardware: The expenditure on workstations, servers, networking, terminal series or Citirix are generally fixed, and it depends on the technology and number of users.

Implementation: It can be as low as 50% of the TCO if the software is based on one-tier architecture and it can be reduced if the buyer has done prior preparation. It can be reduced if the business processes are not complex and the project team is aware of it before the start of the process.

Indirect costs

Indirect costs includes the expense on consultants, maintenance, the time spend by employees on the process, the transportation and communication expenses. It has been found that sometimes these costs are underestimated although it can account for more than 20% of the total expense.

Customization: Modifications and customization in original product can be excessively expensive and sometimes excessive customizations can damage the functioning of a product. Since a number of software companies are providing different type of products - one can select the software which best suits the requirements instead of going for customization.

Training: It includes expense on installation and data migration. Consulting can be three to four times expensive than the license. Remote consulting can go around 20% of TCO. The process includes training the employees and end users. Since the employees are not involved in their routine work - the company may not get the desired work efficiency during the implementation phase and the overall performance in the year of implementation may not be as expected.

To prevent excess expense on training the buyer can define a team which will be involved on the implementation process and the limited number of users can be given training. Software companies negotiate on the point that they are not aware of the technical capabilities of the users and the number of people who will be trained is not fixed.

Post implementation expenses: Generally when a buyer is negotiating a deal - it is preferred to get a five year deal to prevent expense on annual maintenance. Annual maintenance can be 20% of the total expense on software.

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