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Malcolm Roach, Open Door Technology Inc.

What is the Cost of Implementing an ERP System?

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When we talk about budgeting for how much a typical ERP (Enterprise Resource Planning) implementation will cost, let me say that in this article I am referencing mid-market accounting and ERP systems, not entry level or tier one. The total cost of Tier One systems, by the way, can easily cost ten times the cost of the software license or more. Entry-level systems can sometimes be implemented by the end users without any outside assistance.

Companies with a million dollars in sales right up into billions can use mid-market systems. New architectural designs allow some of the mid-market systems to scale up into hundreds of concurrent users. The wide range of possible users makes it difficult to come up with a hard and fast rule for determining what the implementation costs should be. There are some principles, though, that are useful for anyone.

First, understand that there is a great gulf between entry level and mid-market systems. There should be some systems in between these two levels, but the ones that have tried to fill this gap have been uniformly unsuccessful except for a few that are very industry-specific and become a standard for similar organizations. This is important to understand because the level of complexity goes up exponentially when you move from an entry-level system such as QuickBooks to a mid-market system such as Microsoft Dynamics. It is highly unlikely that an organization can implement a mid-market system on their own unless they happen to have a software implementer on staff with experience on the new system. It might be tempting to try this on your own but you should realize that the true cost of a software implementation project consists of much more than those checks you write to the software reseller. It includes the internal costs and the impact on your organization, which are actually much higher. These projects need to work and you need to reduce your risk as much as possible - and that means using experienced implementation resources.

It used to be that you could expect services equal to the amount paid for the software, but competition has led to software price reductions to the point where services can now be three times the cost of the software. This is really just optics as the services numbers based on the level of complexity found in the organization have not gone up, just when compared to the software cost.

One factor driving the prices of implementation services upwards is the requirements of many smaller organizations that now need the same system capability as much larger companies. Every module, every feature, and every company location added into the implementation project will drive up the price. Instead of just using the basic features in a module such as inventory, organizations now find themselves requiring the more advanced features such as advanced warehousing. Additional factors such as mobility, e-commerce, EDI, and document management are all examples of advanced functionality adding to the cost of services.

While Cloud pricing for accounting or ERP systems has driven down the upfront cost of the software, it doesn’t really do anything about the cost of implementing the solution. Service costs are generally the same whether you implement Cloud or in-house systems.

The following are some examples of implementation costs for mid-market systems that might help you. Mid-market systems tend to be sold based on the number of concurrent users and this information is used here to estimate the complexity of an implementation. Larger systems also tend to need more configuration and even light customization. The numbers below do not include any significant customization and/or software.

  • $15,000 to $35,000 - Approximate cost of a base Financial System – includes General Ledger, Accounts Receivable, Accounts Payable, and Cash Management for five concurrent users ranges.
  • $35,000 to $55,000 - Approximate cost of Financial System including an Inventory System – additional modules include Inventory, Sales Order, and Purchase Order for ten concurrent users.
  • $55,000 to $95,000 - Approximate cost of Financial System, Inventory System, and Job Cost or Light Manufacturing for twenty concurrent users.
  • $95,000 to $150,000 - Approximate cost of Financial System, Inventory System, and Advanced Warehousing or Manufacturing for thirty concurrent users.

Larger systems can cost more than $200,000 and are more difficult to estimate because of the variability in the complexity needed and customization requirements. Optimized implementation processes can sometimes reduce the cost of any of these project examples, but the greatest time-savings are generally seen from reducing the amount of individualization in the system. The closer you can stick to the software design or best industry practices, the more money you will save on the implementation – but realize that you may be giving up the ability to obtain competitive advantages or processing efficiencies that could make you an industry leader.

By Malcolm Roach of Open Door Technology, provider of Microsoft Dynamics NAV ERP solutions for mid-market companies

One Response to “What is the Cost of Implementing an ERP System?”

  1. Shama says:

    A very good article I must say. I stumbled upon this article doing a google search for ERP cost implementation. I must say you have included the most crucial points.It would be nicer if this article would cover cost when companies opt for free and open source. I am definitely going to use this information you post here to talk to my future clients. I will push this url in the process. By the way does a great job in ERP software. You might find some information there.

    Keep up the good work,