What determines the cost of implementing ERP?

Many companies focus solely on the cost of software licenses and implementation when acquiring an ERP system, forgetting that owning the system also incurs substantial expenses—and that the short-term and long-term cost picture may differ significantly between vendors. This is especially important with modern cloud solutions, where a large portion of the initial license cost is shifted into the future as the solution is consumed over time.

Total Cost of Ownership (TCO) refers to the total cost of acquiring, operating, and maintaining an IT solution, and there is no doubt that TCO is a relevant and necessary concept to discuss during a procurement process.

Systems that are expensive to acquire and implement often become expensive to own and maintain as well.

There is generally a correlation between the initial investment and the subsequent cost of owning the system. Implementation costs typically constitute the largest portion of the budget, and the main drivers of these costs—often referred to as the project scope—include:

• The scope of the business processes the solution must support
• The organizational and geographical extent of the solution
• The extent of changes to the IT infrastructure
• The amount of required integration
• The scale of data conversion
• The level of system customizations
• The amount of required training

Data conversion in particular can be a major task during an ERP implementation, as many companies struggle with poor data quality in existing systems, and data is often spread across multiple legacy platforms.

The contract model chosen for implementation also strongly affects the price. If the company opts for a fixed-price agreement, the cost may increase by up to around 40 percent, as the vendor will typically add a “risk premium.” The size of this risk premium can be significantly reduced if the scope and content of the required solution are well-defined. A fixed-price contract naturally offers greater budget certainty compared to a time-and-materials agreement. On the other hand, a fixed price results in tighter scope control and therefore less flexibility when it comes to making changes to the solution or the project approach.

Another important factor is the division of labor between the customer and the vendor, which can vary considerably from project to project.

In summary, high implementation costs are driven by:

• Extensive integration
• Many systems customizations
• Significant process and organizational changes
• Traditional waterfall implementations
• Large and complex systems

Conversely, lower costs are driven by:

• Use of standard functionality
• No integration requirements
• Minimal process and organizational changes
• Template-driven implementation approaches
• Smaller and simpler systems