ERP Costs That You Should Know or Avoid

Margit Kustor-Neubauer 7/18/2023

ERP Costs: How to Keep Implementation Costs Under Control

Implementing ERP and full cost control? Here we have the right input for you, so that the implementation of the ERP system works and you keep full visibility in cost planning.

What is an ERP system?

An ERP (Enterprise Resource Planning) is a modern software solution that supports your company in managing and optimizing all operational processes. It is therefore a comprehensive system that integrates various departments and functions of your company and centralizes information.

An ERP system is indispensable to remain competitive and grow successfully in an increasingly complex business world.

What is an ERP?

When do companies need an ERP system?

The need for a good ERP system usually arises due to the growing complexity and scope of today's business activities. If your company has to do with numerous tasks, such as financial management, inventory management, customer relationship management, human resources and more, it is hardly possible to keep an overview, minimize data errors and make informed decisions without ERP.

In addition, a company can use the ERP system in different phases of development. Consider the following signs and circumstances as an indication that your company can benefit from an ERP system:

Growth and scalability

When your company is growing rapidly, this can lead to increased complexity and a larger number of business processes. An ERP system offers scalability and helps you organize, coordinate and integrate processes.

Siloed information

If information and data are stored in isolation in different departments or systems, there are usually difficulties in merging them. If you need a comprehensive overview of your company, this is only possible with a lot of effort. An ERP system takes care of the integration of the most important information and improves the flow of information.

Manual and error-prone processes

If your company carries out many manual tasks that are time-consuming and offer room for errors, ERP can automate these processes and improve the accuracy of the data.

Lack of transparency

If there are difficulties in your organization in obtaining real-time information about stocks, finances, customers or other business-relevant data, the system creates more transparency and enables real-time insights.

Customer orientation

If you want to improve customer service by centralizing and coordinating customer data and interactions, the ERP system provides the basis for this.

What costs are associated with the implementation of an ERP system?

How much does an ERP system cost? This question cannot be answered in general terms. The expenses for the implementation of an ERP system can vary greatly. The following factors have a particularly strong influence on costs:

Size of the company
Complexity of business processes
Software or license costs
Hardware and server infrastructure
Adjustments and configurations
Training of employees

What start-up costs can you expect with an ERP system?

The start-up costs depend on the provider, license type and size of your company. It is therefore difficult to give specific figures, as they depend heavily on specific circumstances.

License costs

The costs for the ERP software licenses can vary greatly depending on the provider and model. Prices can be stated per user license, per module or as a flat fee for the entire system.

Implementation costs

The implementation also accounts for a significant part of the ERP start-up costs. The following factors influene it:

Complexity of the company
Number of users
Functionality and modules
Configuration requirements
Data migration

Training costs

The costs for this depend on the number of training participants, the duration of the training and the type of training (on-site training, online training, train the trainer). Please also note that your employees may not be able to perform their usual tasks or only to a limited extent during the training.

Hardware and infrastructure costs

If your company needs additional hardware or server infrastructure for the ERP system, additional acquisition costs will be incurred depending on the selected solution (local servers or cloud-based solutions).

What internal & external costs are incurred?

You don't buy an ERP system overnight. Rather, you should take a lot of time already for the planning phase. During this phase, you have to determine which functions the ERP software must offer and which processes you want to map with it.

Watch out for all internal costs

First evaluate the processes in your company. With simple business processes, you can usually use standard modules for coverage. In the case of more complex processes, however, additional modules are required, which have to be specially configured.

These considerations do not generate any explicit costs, but the effort required for evaluating and analyzing your business processes takes a lot of time, which ultimately has a monetary value.

The infrastructure has to fit before the ERP can be implemented. If you still need to upgrade or modernize it, these are further expenses.

In order to be able to use the ERP system efficiently, a reorganization of your business processes is often necessary. You also need project staff who support you from the planning phase, bring their expertise from the relevant departments, but are pulled out of day-to-day business.

The software usually doesn't run at the touch of a button and even after extensive training measures, you should consider a settling-in phase until your employees can work really productively.

Calculate all external costs

Externally, additional costs also arise, which initially appear rather inconspicuous. But since they usually make up the main part of the total costs, you should be familiar with them and calculate them in detail.

You may also need an external consultant to assess and manage the complexity of your ERP project.

Apart from hardware and license costs, efforts are also incurred for configuring the ERP system. The various modules and functions of the ERP system are configured according to individual needs. This includes setting parameters, defining workflows, adjusting reports and setting user permissions.

Another cost factor is migration. Data such as customer data, supplier data, product information, inventory data, financial data, etc. are extracted from the old systems, cleaned, transformed and imported into the ERP system. The amount and quality of data and the complexity of the data structure determine how high the migration costs are.

There are also other costs for the ongoing operation of the system. These can be further consulting costs, efforts for customizing or the ongoing maintenance and system updates.

Are there hidden costs with an ERP system?

With an ERP system, various costs can occur that may not be immediately obvious. The hidden costs mainly include adjustments and extensions to the system to meet specific requirements of your company.

Data migration and cleansing from existing systems, training for employees, and long-term maintenance and support of the system can also cause hidden costs.

It is therefore important to take these potential cost factors into account when planning and budgeting an ERP project. This is also true for the ongoing operation, in order to avoid financial surprises and to get a realistic assessment of the total costs.

ERP costs - hidden costs

How can the ERP costs be reduced?

Well planned is half won. Where you should plan particularly precisely and which approaches you can still use to reduce costs, we will reveal here:

A detailed needs analysis helps you to understand the exact requirements of the company and to ensure that the selected ERP system meets these requirements. A precise needs analysis can avoid unnecessary functions or modules, which can lower costs.
Every adjustment to the ERP system can incur additional costs. It is therefore important to critically examine whether adjustments are really necessary or whether existing business processes can possibly be adjusted to meet the standard functions of the ERP system.
Careful project planning and management also helps to adhere to budget and timeframe. Clear milestones, effective resource allocation and regular monitoring can avoid cost overruns.
Comprehensive training of your employees is essential to use the ERP system effectively and reduces potential errors or inefficient ways of working. So you lower support or correction costs.
Likewise, the use of cloud-based ERP systems can reduce the need for expensive hardware infrastructure. Cloud solutions offer scalability, flexibility and reduce the initial investment costs.
It is also worthwhile negotiating with ERP providers about license and maintenance fees in order to achieve possible cost reductions. Checking for discounts, package deals or flexible payment options can also lead to savings.

When is a free ERP system worthwhile?

ERP systems are usually a very expensive purchase. In some cases, free software may also be worthwhile.

Especially, if your company is still relatively small and has simple business processes, a free ERP system may be sufficient to meet the basic requirements. It mainly offers basic functions for managing sales, purchasing, warehousing and accounting.

Start-ups and companies with limited budget can also benefit from a free ERP system, as it offers a cheap way to automate and manage basic business processes.

Despite this, you should carry out a thorough evaluation of your own requirements, the scope of functions of the free system, scalability and future requirements. You should carefully check the scope and limits of the free ERP system.

If you have the know-how or the resources to develop an open source ERP for yourself, a free tool can also be the right choice.

When is it worth buying an ERP system?

Is your company growing or are you tired of many standard processes running out of control? With an ERP system you gain control, automation and transparency, which pay off even for a company size that is still manageable.

You can find out whether the purchase of an ERP system is worthwhile by assessing the following factors:

Operational needs
Cost-benefit analysis
Inclusion of relevant stakeholder groups

ERP for medium and large companies

Medium and large companies with complex business processes and a variety of departments can benefit greatly from an ERP system. It enables the integration and automation of various functions such as finance and accounting, sales, purchasing, warehousing, production, personnel and more.

ERP for SMEs

Even smaller companies have many needs, which can be covered by a tailored ERP solution. The software makes its contribution to improving operational processes, takes over data consolidation and improves the necessary competitive advantage.

ERP for companies with multiple locations

If your company has multiple locations or branches, you can use the ERP system to ensure unified data management, process harmonization and real-time communication between the locations.

ERP support for international presence

If the company operates globally, the system supports specific requirements such as multilingualism, currency conversion, international trade regulations and country-specific compliance.

Optimization of supply chains through ERP systems

If the company has complex supply chains, it needs a high-quality ERP tool to optimize the planning, monitoring and control of suppliers, inventories, production orders, logistics and distribution.

High compliance requirements with ERP

If the company is subject to specific compliance requirements, as in the healthcare, food industry or financial sector, you need an ERP software to support compliance with regulations and comprehensive traceability of business processes.

Better data consistency thanks to ERP conversion

If the company has difficulty ensuring consistent and reliable data across different departments and systems, you should invest in an ERP system. It enables the central management of data and ensures a uniform and reliable database throughout the company.

Which tools are suitable?

There are a multitude of ERP tools on the market, which are suitable for different companies and industries. Especially for the sector Trade and Commerce , we have prepared a new briefing. Otherwise, you will usually find a considerable selection on OMR-Reviews, including package prices for your cost comparison and particularly comprehensive user reviews. Therefore, we can particularly recommend the following ERP systems:

SAP S/4HANA Cloud, public edition

Free ERP tools

Of course we don't want to withhold the free ERP tools from you, which can be a good option for smaller companies or start-ups. In addition, the ERP systems listed here are also Open Source solutions, which you can also develop further if necessary.

Conclusion: high effort, but it's worth it

An ERP tool is supposed to bring long-term advantages to your company. To do that, you need to know exactly where to install it and you also need to look a bit into the future of your business. Improved efficiency and productivity, better decision-making, transparency and scalability should ultimately have an effect throughout the company. The ERP system costs are hardly transparent at first glance and go far beyond hardware and license costs. Despite these challenges, the use of ERP software is a worthwhile investment that seeks sustainable growth and competitive advantages.

Open-Source-ERP

Author

Margit Kustor-Neubauer