To
determine the Total Cost of Ownership (TCO) of an ERP system, prospective
business owners need to plan for the fixed costs of the software and the
uncertain variable costs that come with implementation. For IVK, we made the
following assumptions, and estimated TCO. We know that IVK is a mid-sized
growth company (approximately 400 employees) that invested less in technology during the dotcom era than
their competitors. The company is assumed to have 400 employees with 100 of
them being earmarked as users for the SAP ERP system. IVK’s revenue for the
current year is approximately $233MM and with recent leadership focus and
restructuring it can be assumed there is planned growth in the future. However,
IVK has experienced a decline in revenue over the last year. IVK has a problematic ERP system, because is fairly
young it is assumed IVK has capable hardware. In IVK’s case, we are
recommending new ERP implementation to keep them “competing” instead of
“qualifying.” It is difficult to keep up with the pace of evolution in
the digital world unless you have flexible IT infrastructure. (
For
planning purposes, based on IVK’s current and assumed needs, we have used a cost-calculator from SAP’s website to estimate Business All-In-One Solution. After evaluating cost and capabilities of different SAP solutions, we
chose Business All-In-One Solution (Fornes, 2010). We chose to estimate and
factor the cost of adopting Business All-In-One solution. We have considered a 1:1
ratio of software:services for costing out our project as is suggested in a white-paper posted
by ERPSoftwareBlog. The major categories of fixed costs are
software, hardware, and implementation needs. The software will include
various functions from the following services: financial, controlling, sales,
service, cross function, and analytics. Our variable costs will include fees
associated with configuration, integration, migration, testing, training, and
ongoing maintenance and support.
We
used the SAP cost configuration to work from a “Services” configuration, then
reviewed and chose which functions we thought best suited the current and
future needs of IVK from the product. We chose 6 of the 8 services offered and
from those, 23 different functionalities. We were able to obtain a quoted
purchase price of approximately $563,800. Using this as the base fixed number, we
then were able to add assumed variable cost to derive our final TCO estimate.
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(Image retrieved from SAP.com, generated 10/4/14.
https://www.sapconfigurator.com/sapcfg/build/index.html?lang=en&campaign=CRM-US08-HUB-TC_FSTWEB&cntry=us) |
The variable costs are categorized as implementation and consulting services, maintenance, users (# of user accounts), and integration services. The costs of buying SAP ERP for IVK can
be estimated by making assumptions related to maintenance and service fees
after implementation as well as integration fees for customer relationship
management and human capital management platforms. There are several fees that
IVK could incur in the future that are not estimated below, the reason being
there are not reasons to assume IVK is ready to implement or expand beyond the
basic ERP implementation and integration of a CRM and HCM system.
(Calculations have been generated based on assumptions retrieved found through Aberdeen Group, Inc.'s publication)
Other
future variable cost that are not included in the estimate above but were
listed as common cost incurred are as follows: equipment storage, new employee
compensation, celebration funds, training and travel expenses, ERP conference
attendance, office and clerical supplies, budget management and audit costs,
control consultants hours, hardware purchasing and network costs (Herbert,
2006).
The estimated TCO comes to $1,308,098, which aligns slightly
over the 1:1 ratio of fixed to variable costs. ERP implementation can
cost hundreds of thousands to millions of dollars. This does not include the TCO
if the implementation is botched, and a savvy manager also needs to consider
the credibility and transparency of the third party vendor hired to implement
ERP (Austin, R., et al, pps 117-121.) Additionally, a wise implementation
strategy will play a big role in its success to come in on budget and on time.
From Panorama Consulting, we know that only 37% of ERP implementations
come in on budget and implementation has a 44% chance of going over budget.
ERP Software Blog and Herbert both offer tools to work through potential implementation costs. However, planning is key. “Whatever method you use to develop your budget – from sophisticated software to spreadsheets – the output is only as good as the information you input. (Herbert, 2014.)
