Costs of Implementing an ERP System
by Dr.Scott Hamilton
1. Costs of Implementing an ERP System*
2. One-Time Costs
3. OnGoing Annual Costs
Costs of Implementing an ERP System*
Enterprise resource planning (ERP) implementation costs can be divided into one-time costs and ongoing annual costs. Both types of costs can be segmented into hardware, software, external assistance, and internal personnel.
Software. The cost of an ERP software package varies widely, ranging from $30,000 (USD) for micro-based packages to several million for some mainframe packages. The number of concurrent users generally drives the software costs, so that smaller systems cost less. For illustrative and general guideline purposes, the software package costs range from $50,000 to $200,000 (USD) for smaller manufacturers. In addition to the ERP software package, one-time costs may include systems software, development of customized software, or integration with other applications.
Hardware. Hardware selection is driven by the firm’s choice of an ERP software package. The ERP software vendor generally certifies which hardware (and hardware configurations) must be used to run the ERP system. Hardware may need to be replaced or upgraded. As a general rule, small to medium-size manufacturers already have microcomputers and a local area network, so that a micro-based ERP system built on de facto standards requires little additional investment in hardware.
External Assistance. External assistance includes the consulting and training costs to implement the ERP package. The software vendor, reseller or independent consultant groups may provide external assistance. The amount of required external assistance is dependent on several factors, such as the complexity of the ERP package, the experience or knowledge of internal personnel, and the extent to which external personnel are used in place of internal personnel to implement the system.
A general guideline for these costs has been the ratio with the cost of the ERP software package. A comprehensive micro-based ERP package typically has a .5 to 1.0 ratio; the manufacturer requires $.50 to $1.00 (USD) of external assistance for each dollar of software package costs. The elapsed time for implementation of the entire ERP application typically requires four to six months. Many of the mainframe ERP packages have a three to five ratio for the costs of external assistance. The software package typically costs more, and the elapsed time for implementation requires nine to twenty-four months.
Internal Personnel. Internal personnel time reflects the time commitments for the implementation project team, the executive steering committee, the users in various functional areas, and management information system (MIS) personnel. The time commitments include training classes, development of internal procedures for using the system, developing customized reports and applications, preparation of the data, meetings with external consultants, and team meetings. A general guideline for internal personnel costs can also be expressed as a ratio with the ERP software costs, where a typical ratio is .5 to 1.0.
The one-time costs for implementing an ERP system can be simplistically estimated using typical ratios with ERP software costs. These ratios are summarized in figure 3.4 for one-time and ongoing annual costs, along with example calculations for a $100,000 (USD) ERP software package.
The one-time and ongoing annual costs for hardware are not included in the example. In many cases, the use of de facto standard hardware means that a firm already has the hardware for an ERP system. The example shown in figure 3.4 indicates an estimated $300,000 (USD) for one time costs and $65,000 (USD) for annual costs related to an ERP system.