10 Commonly Overlooked Areas that Can Potentially Add to Your ERP Costs

10 Commonly Overlooked Areas that Can Potentially Add to Your ERP Costs

Companies looking to replace or upgrade their ERP can get bogged down or confused when attempting to create a budget for the project. That’s understandable because there are many moving parts to any ERP implementation, and every company has different cost structures, making it hard to compare apples to apples.

One of the first things ERP resellers will tell you is that there is no way to give you a realistic price quote without first looking at your unique business needs. That’s true for everybody, so getting a firm quote won’t be easy until you begin the sales process in earnest. But one thing you can do during your evaluation phase is to identify where costs can occur, determine what those costs will be in your situation, and know where you can exercise some control over those ERP implementation costs so you can ask the right questions when it is time to look for your next ERP.

This blog identifies ten cost “gotcha’s” that are commonly overlooked when evaluating a new ERP.

1. Deployment options: On premises or cloud?

One of your first decisions is whether to deploy your ERP on premises or in the cloud. Which deployment option you choose will result in different costs for your ERP.

On premises deployment means the computer hardware resides on your property. You must first purchase or lease the equipment and supporting software and operating systems, which can represent a sizeable capital expense. You are responsible for maintenance or upgrades to the hardware (servers, disk drives, operating systems, internal and external network connections, and application software). You will also be responsible for allocating office space for the equipment; maintaining network security; providing proper power and cooling; staffing for maintenance and administration; and ensuring failover capabilities, backups, and redundancies are maintained and performed.

Cloud deployment means that virtually all of the activities normally performed on premises (hardware and software maintenance, network security, backups, availability, etc.) are handled by the hosting provider. Resources such as additional hardware, disk space, and data throughput can be added or removed as needed to accommodate demand fluctuations in your business. Cloud providers charge a monthly fee for their services. Understand that the monthly fee for cloud deployments does not necessarily make them “cheaper” than on premises deployments. However, it eliminates much of the overhead for routine tasks, freeing your IT staff to perform more valuable tasks for your organization.

While cloud deployments generally are more cost-effective and preferable on many levels, many companies still choose on premises deployments for various reasons, such as meeting regulatory requirements.

2. Single-tenancy and Multi-tenancy

Cloud deployments can be either single-tenant or multi-tenant.

In a single-tenant model, each customer is granted dedicated resources to host their own instance of the software and access to their own dedicated database instance.

In contrast, the multi-tenant model has all customers share the same hardware and software resources using a single application and database instance.

The two deployment models are often compared to a neighborhood of single-family homes vs. an apartment building.

Multi-tenancy makes more efficient use of resources, resulting in lower costs. However, customizations are often restrictive to make sure they apply to all users. There is also a concern that if one tenant is breached, other tenant data might be at risk.

Single tenancy provides more latitude for customizations and more insulation from a data breach on another tenant using the same provider. However, the downside is often higher costs due to underutilized resources and more setup and maintenance time for your dedicated instance.

Some modern cloud-based ERPs only offer multi-tenant deployments, others only offer single tenancy, and some offer both. Be sure to determine your preferred deployment model and find out the true costs for each.

3. The cost of doing nothing

When evaluating any ERP, one option always open to you is to remain on your current ERP. The perception is often that doing nothing saves money because the ERP is already paid for, everyone knows how to use it, and the business processes are already in place to support it. Even if all that is true, the problem is that your current ERP might not be optimized for newer capabilities available in modern ERPs. Moreover, failure to maintain your support plan for aging ERPs can result in missing important security updates, potentially leading to data breaches and regulatory penalties. Another reason to consider updating your ERP is that modern ERPs have added features formerly only available in an enterprise (Tier 1) ERP, so you might not need to pay for additional customizations or third-party add-on products to perform the same tasks.

Be sure to consider these potential costs when making your decision.

4. Customizability and add-on products

Unless you have super simple business processes, chances are good that no ERP will work for you right out of the box—you will have to customize it in some way or purchase third-party add-on products to round out the capabilities to fit your company.

Be sure you understand the cost of implementing any add-on products you will need, along with recurring licensing and maintenance costs.

If you require customizations, you should also be aware of how extensive those customizations will have to be, how easy it is to find talent to write the customizations, and a typical hourly rate for programmers to write those customizations for you. While you might have technical resources on staff, most ERP customizations are performed by contractors specializing in that vendor’s product.

5. Scalability

You don’t want your ERP slowing you down as your business grows. It should be easy to expand your ERP to include your anticipated 3–5-year goals, including adding new stores, going international, expanding into new markets, and merging with and acquiring other companies. You should be aware of any restrictions and costs associated with adding companies or users, particularly if there is a limit to how many you can add.

6. Exporting data

All ERPs will store their information in some type of database. That data contains all your company information: costs, customers, invoices, inventory—in short, everything! If and when the time comes to move to another ERP, how easy is it to get your company’s information from the old database and import it into your new ERP?

Don’t laugh; it can be more challenging than you think!

Some ERPs will hold your data hostage, only letting you export a portion of your data as comma-separated values (CSV) files that do not preserve any relational aspects of the data. Make sure the ERP you select will let you export your data (yes, you own your data!) in the format you desire—and have the partner show you how easy (or difficult) it is to do it.

7. Reporting

As the keeper of your company’s financial information, your ERP should be able to provide reporting capabilities for your leadership team. Most ERPs come with built-in reporting capabilities, but modifying these stock reports can be expensive, requiring trained professionals or purchasing add-on products. Ensure the ERP you select comes with the reporting capabilities you need and can be customized easily with minimal additional cost.

8. Per user costs

ERP vendors will typically charge depending on the number of users accessing the system and the type of access each user requires, whether you are deploying on premises or in the cloud.

When deploying on premises, you might be given a choice to pay a monthly fee per user or to make a one-time purchase. Monthly subscriptions are essentially a lease, distributing the cost over the time you use the software. Access to the software terminates when you stop paying your monthly fee. A one-time purchase (“perpetual licensing”) lets you own the software and use it indefinitely; however, to continue to receive support from the software vendor (such as new features, bug fixes, and security updates), you will have to pay an annual maintenance fee (typically 12-20% of the purchase price). Cloud deployments are almost exclusively all monthly subscriptions.

Costs can vary depending on the level of access the user requires. For example, your accountants will likely need full access privileges. In contrast, a warehouse worker who only needs access to the system to enter their time will need minimal access privileges.

User licensing can also vary depending on the software manufacturer. Some ERP companies charge by the number of users requiring simultaneous access (“concurrent user licensing”), and others charge by the specific users who need access (“named user licensing”).

Some ERP vendors don’t charge by users at all. Instead, they charge by the amount of monthly data or transactions processed. In this model, you have unlimited users; however, more users accessing the system at the same time will require more network resources. Unlimited users may or may not save you money, but it does eliminate the worry about exceeding your user limit.

9. Data usage and transaction volume

In addition to your hardware resources (processing, memory, database size, and disk space), cloud-based ERPs often incur a charge for data or transaction volume. Most will have a graduated scale, charging a small amount for low volume and increasing costs as volume exceeds pre-defined thresholds. Some of these price increases can be rather substantial. Part of your due diligence should include analyzing your anticipated data usage and transaction volume so you know how much you can anticipate spending.

10. Additional licensing costs

In many cases, you won’t just be deploying an ERP system. There is often an external database, add-on products for activities like payroll or warehouse management, and perhaps a CRM or a reporting engine. Each of these cost money and the costs add up. Understand all the components you will need and their licensing and maintenance costs before committing to an ERP product.

To learn more, read about how to select your next ERP or download the eBook, Selecting an ERP System: 9 Key Considerations for a Successful Search.

Trending Posts

Stay Informed

Choose Your Preferences
First Name
Last Name
Subscription Options
Your Privacy is Guaranteed