ERP Price – What’s the cost of an ERP implementation?
So you need to implement an ERP but are not sure how much you should pay?
What the cost of an ERP software?
Where do most of the money go? The actual software? To the time your employees spend on the project? On hardware? On consultants?
Let me clarify that!
Let’s start by the rule of thumb: estimate that the cost of your ERP will be 3 to 6% of your annual revenues. This is of course a rough estimate since many factors have to be considered.
How much cost a house?
You wouldn’t know how to answer that right?
You need more details to be able to answer… Where? What size? Quality of materials? Do you want a pool, 4 bathrooms? Do you build it by yourself, buy pre-built, etc.
It’s the same for the cost of an ERP. There’s no quick answer, the ERP price really depends on what you’re looking for.
Factors that influence the ERP price
Many factors influence the price of an ERP:
- the size of the company (and the number of users and divisions)
- the type of solution (the more specialized, the pricier)
- the needed resources (external consultants, time spent by employees, etc.)
- the level of customization
How much does it cost? – ERP Price
As a rule of thumb, you can expect the total cost of an ERP implementation to be 3 to 6% of the annual revenues of the company.
Let’s say you have 10 M$ of revenues, estimate a total ERP implementation cost between 300 000$ and 600 000$.
Breakdown of the costs – ERP Price
First of all, it’s good to know that the price of the ERP software is only a fraction of the ERP price
What do I mean?
Well, let’s say you have to invest 1 million for your ERP implementation, buying the actual software would only cost $300 000. The rest of the money goes elsewhere! Employees and external consultant is where the majority of the budget will be spent, mostly during the ERP implementation.
|ERP Implementation Costs||% of budget|
|ERP Software cost||15 to 30%|
|Database management system||5 to 10%|
|Infrastructure||10 to 20%|
|Employees and consultants||40 to 60%|
Don’t forget that you’ll also have to pay annual recurrent fees. They’re not included in the initial cost of the ERP, but make sure you look at them carefully as it affects your long-term investment. Expect to pay 10 to 20% of recurrent fees for your software & DBMS.
A. ERP Software Cost
So, what is the actual price of an ERP software? The actual software accounts for about 15 to 30% of the total cost of an ERP implementation project. Each vendor will have its own pricing model, but the ERP software costs will vary according to three factors:
If your company is in a specialized industry, you may find it more difficult to find an ERP that fits your needs, while a manufacturing company will have literally thousands of choices, thus a reduced price.
The size of the company and number of users
The number of users is the main factor that influences the price of the software. The more users, the more expensive the licensing.
The number of locations
Having multiple locations will increase the cost of an ERP. Depending on their pricing model, a vendor may charge more for a multi-locations company.
B. Database management system (DBMS) – ERP Cost
When you buy an ERP, licenses for the Database Management System need to be bought separately. Often these licenses won’t be included in the price of the software since it’s a different product, developed by a different company.
Some systems will be rather expensive while some vendors may use a free database system, like MySQL. Most of the ERP systems will either use Oracle or Microsoft SQL Server. Both have two pricing models: the number of servers (CPU) and/or the number of users.
Expect the DBMS cost at about 5 to 10% of the total ERP cost.
C. Infrastructure – Cost of an ERP
You also have to take into account the infrastructure to run the ERP.
This includes all the needed hardware to run it. This will vary for each company, but it should include:
- The servers
- The cost of storage (hard-drives, external storage, etc.)
- The cost of external backups
- New computers for users
Estimate the total cost of the infrastructure at about 10 to 20% of an ERP implementation project.
D. Human resources – Cost of ERP –
Human resources are where most of the ERP implementation budget will go. Consultants cost and employees’ wages may account for more than 50% of the total ERP cost.
ERP Consultants Cost
If you don’t already have one working for you, I always suggest you hire an independent business analyst. He’ll be of great help during the whole process. Not only will he help you analyze your business needs and business processes, but he’ll be there to have an external eye on the vendor implementation team so you get the best out of your implementation. Always make sure you have someone on your side that knows what he’s doing. It’s always good to keep the vendor in check!
… keep the vendor in check during the implementation with an independent consultant…
Or maybe you’ll need an industrial engineer to optimize your manufacturing processes. In any case, external consultants are not cheap – hourly rates range from 50$ to 150$+ – but hire the right ones and they’ll definitely going to save you money.
Note that the cost of the vendor’s implementation team should be included as a package with the software (since the ERP has to be configured by the vendor to work).
Internal resources cost
Do not forget to include the employees’ wages in your ERP implementation budget.
Employees will be needed throughout the whole process and super-users may spend more than half of their weeks working on the ERP. You may also need to hire temporary employees to replace those who are working on the ERP.
E. Recurrent costs not included in the ERP price
Annual fees are also a major factor in the total cost of ownership of an ERP. Some vendors will sell the software at a lower price, but the license renewal will be more expensive. Others will do the opposite.
License renewal fees
For each year you own the system, you’ll have to pay a license renewal fee (the first year is normally included).
The industry standard for an ERP license renewal fee is 10 to 20% of the ERP software price. If an ERP is sold one million, the annual cost should be between 100 000$ and 200 000$. For this annual fee, the vendor provides minor and major software updates.
Do you need to pay those fees? Not always. But that also means that you won’t receive any more updates and not updating an ERP is a very, very bad idea!
Sometimes, the first year of support is included with the sale, but afterward you have to pay for it. The fees can greatly vary from vendor to vendor, but they do provide options at different prices.
The support fees are optional, but you have to pay by the hour if you have a problem and don’t have a support contract.
F. ERP Software Price – Customization
What happens if you need a feature that’s not already in the ERP system?
When a feature is missing, it may be necessary to ask the vendor to develop or adapt a module. The vendor may charge by the hour for small projects or may sell a package deal. Development hourly rates normally range from 75$ to 150$+ an hour.
Note that if you identify those needs before buying the ERP, the vendor could include the needed developments on the contract, free of charge. Another good reason to do a thorough business analysis!