The Real Cost of ERP Implementation

Competing in today’s marketplace requires many companies to consider using enterprise resource planning (ERP) software to connect and manage a torrent of data related to planning, operations, financials, supply chain, manufacturing, human resources, and compliance reporting.

Implementing a well-integrated ERP is the gold standard for enterprise management. However, identifying and purchasing the right software solution is just the first step in the process. In addition to budgeting for acquisition, it is important to plan for additional costs related to implementation, hardware, training and overhead and third-party consulting services.

Companies that lack the in-house knowledge and expertise to assess ERP options often work with a partner to identify the right ERP software and develop a strategy that ensures a positive return on investment.

The first step for any company thinking about automating its systems is whether it needs an ERP. It is important to understand what problems an ERP will solve and whether it is the right option in any given use case. If an ERP is the right option, there should be a clearly defined return on investment (ROI) for the implementation plan. In some cases the ROI will be more strategic while in others it may be more tactical. Regardless, the business owner should know what the expected outcome should be before they purchase. After all, if you don’t know what winning looks like, how can you get there?

Not every business needs to implement or upgrade their ERP. We find that the existing ERP system is just fine about 30% of the time. The company just needs to rethink how they implemented their existing software and take action to correct any errors that happened at the time of implementation. This is also a good time to assess any changes to the business since the time of implementation.

For companies that do need a new ERP, the single biggest mistake they make is implementing a system based on previous needs, rather than determining what they need to scale in the future. Automating and optimizing for the past is a sure way to increase costs in the present and preclude the desired future. Companies will need to assess what they want to be to be able to figure out what processes they need to automate and optimize.

Another pitfall is that companies try to “go it alone”.   They miss the tremendous value offered by an independent ERP partner.  ERP Vendors implement the system that’s easy for them to implement – not the one the customer needs to be most successful.  Managing the ERP vendor and the business to obtain the best ERP outcome is critical to success.

Software acquisition and infrastructure are key decisions that are driven by the unique needs of each enterprise. That means aligning the software with business needs and deciding if the applications will run in the cloud, on-site or in a hybrid environment.

It’s important to remember that acquisition and network deployment are only part of the cost consideration. If you spend $300,000 on your software and infrastructure, you’re going to spend around that same amount on internal labor. Companies often forget to allocate this cost.

Moreover, integrating an ERP with other systems, such as a customer relationship management (CRM) program will add cost. Another potential expense that should be factored in is the need to add functionality that may not be included with the core ERP package.

This aspect of the ERP package can be added later on, but ultimately, one day you’re going to have to spend the money. If you know you’re going to implement certain integrations downstream, you should account for that from the start. This translates into less expense in the future.

According to research by Sharker and Lee, ¾ of ERP implementation projects fail. A similar estimate from McKinsey estimates that “70% of complex, large-scale change programs don’t reach their stated goals.”

Common pitfalls identified by McKinsey include lack of management support, inadequate employee engagement, the absence of cross-functional collaboration and a failure to ensure accountability. ERP implementations fail  because often companies don’t spend enough time planning in the beginning stages. Purchasing the most expensive package within a company’s budget is not always the best answer to an ERP problem. Purchasing an ERP this way does not allow budget for implementation.

Another common problem is that companies underestimate the time and internal resources required to implement and manage an ERP. Companies will either need to hire external people to backfill their teams so they can drive the implementation, or they will need to bring in third parties that handle the implementation and then cross-train the company’s team so that when the consultants leave, their cost goes away, too.

Defining benchmarks and key performance indicators can help ensure a successful ERP implementation that delivers return on a company’s investment. When a company does their planning upfront, they will need to define what success looks like and what the metrics for success are. This will vary company to company.

Another hidden cost to consider is database integration. Optimizing a new ERP requires the replacement of legacy systems and siloed databases with a unified database that can seamlessly integrate with an enterprise ERP solution. An ERP system includes the applications that users see, but it’s the database underneath that matters.

Open source Oracle or SQL database solutions are usually a good start for most companies, but companies that are scaling quickly need to ensure that their database solution is robust enough to accommodate their growth.

Another important decision is whether to implement a cloud-based ERP or a local solution. Most companies end up with a hybrid solution in which some components are internal and some are in the cloud. Additional products, like Salesforce integration, can then be bolted on in the cloud.

Formulating an ERP implementation strategy takes time and resources, but the potential pay-off can make it all worthwhile. “A transformation effort is not for the faint of heart,” notes the McKinsey report, “but establishing a performance infrastructure is an essential ingredient of a successful transformation—one that yields rapid, dramatic and sustainable business improvement.”