How Much Does an ERP System Cost?
Discover the ins and outs of ERP system costs in our comprehensive blog, from licensing fees to implementation expenses, with Velosio.
Discover the ins and outs of ERP system costs in our comprehensive blog, from licensing fees to implementation expenses, with Velosio.
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Most business leaders understand that ERPs are one of the biggest investments they’ll ever make. They also understand that the benefits of streamlined processes, enhanced visibility, and quick, data-informed decision-making have outsized impacts on the bottom line.
Still, one question looms heavy on decision-maker minds: “how much is an ERP system cost?”
Unfortunately, there’s no easy answer here. There are far too many variables that influence the final price tag. That said, there are some things you can do to get a better idea of how much ERP upgrades should cost.
In this article, we wade into the complex waters of ERP pricing. How to calculate TCO & ROI. Which factors have the greatest impact on the final price tag. How to optimize costs. We’ll also talk about the big-picture implications of this critical investment.
Total Cost of Ownership (TCO) measures the full cost of using/maintaining an ERP over its entire lifecycle.
Those costs include: purchase price, licensing, implementation, and operating costs, as well as any investments in improving/upgrading the system over time.
Calculating TCO is an important part of the ERP decision-making process. It helps orgs set a budget, choose a vendor, measure ROI, manage risk, and more.
Basic formula: Purchase Price + Implementation + Operating Costs for the next 5–10 years.
As you can see, there’s a lot of room for variation within that “simple” formula. Purchase price, for example, depends on how many users need licenses, what type of licenses they need, and how many different solutions/providers you’re using.
Then, of course, you’ll need to calculate your “operating costs for the next 5-10 years.” That alone seems like an impossible ask. And – that’s before you consider the many complexities shaping the business landscape both now and in the future.
In these next few sections, we’ll look at the factors with the greatest impact on ERP costs and explain why they belong in any TCO calculation.
ERP Software Blog estimates that software costs typically account for 15-30% of total implementation costs. While that may sound like quite a range, here are a few key factors that can help you get a better idea of how much you can expect to pay for software licenses:
The most obvious place to start is by looking at how many licenses you’ll need to purchase. The smaller your org, the fewer licenses you’ll need.
It makes sense that the more ERP licenses you purchase, the more you’ll pay for service.
But, more users doesn’t only increase your monthly software bill. It also introduces additional structural considerations that could impact existing business functions, processes, and infrastructure – and, thus, increase operating costs.
Most ERPs support remote/hybrid work, mobile teams, and seamless collaboration with far-flung colleagues and clients.
But, some vendors may still charge multi-location orgs more than those based out of a single headquarters — whether they’re working remotely or not. The reasoning is, if you’re operating out of several different countries, you’ll need a system that can instantly convert currencies, perform tax calculations, and comply with complex regulations across multiple continents.
Check with individual vendors to find out whether the number of locations will impact licensing costs — and, if so, to what extent.
For example, Microsoft doesn’t charge enterprise customers more for multi-location support.
They can upgrade to D365 Finance and Supply Chain Management (which may be out of their budget range or include too many features they don’t need). Or, they can look toward partner solutions — available in the AppSource store or directly from a provider in their network.
Some ERP vendors offer different types of licenses for different groups of users.
You might purchase full licenses for in-house employees involved in running core finance or operational functions. But – you might also work with a team of freelancers that support your marketing efforts or channel partners that sell your products in certain territories.
In those instances, it doesn’t make sense to pay for full licenses. These groups only need access to certain features and data sets. It’s both a waste of money and a security risk to grant them more access than they need.
ERP solutions aren’t purchased in a vacuum. These days, it’s more about building an ecosystem in which the ERP supports the whole organization.
As such, many vendors also provide CRM and line-of-business solutions, low-code platforms, and advanced analytics tools that extend the core ERP. Often, sticking within a single ecosystem can save you some money.
First, it makes implementation, upgrades, and customization a lot easier, allowing you to spend less time and fewer resources on configuration. Second, many of those solutions can be purchased at a lower rate with a qualified ERP subscription.
For example, Dynamics 365 Finance and Supply Chain Management subscribers can license additional modules (i.e. D365 Project Operations or Field Service) at a lower price point. This allows you to build a comprehensive system for less than you’d spend if you were to pick and choose ecosystem solutions from multiple vendors.
Ideally, you should limit the number of vendors in your ERP ecosystem. When solutions are designed to be used together, it makes it a lot easier to configure and customize your system. But, it’s not always realistic to work with a single vendor. At least not right away.
If you’re working with multiple vendors, you’ll need to think about the cost of each license, the license type, and the billing model, of course.
You’ll also need to consider additional licensing costs that might seem less obvious. If you’re working within a hybrid environment, with some solutions hosted on-prem and others in the cloud, you’ll need to exercise some caution. Violating the license terms and deployment policies in your contract could result in some serious fines.
You might also need to purchase extra licenses to extract existing ERP data and migrate it to the new system.
Some ERPs — like Dynamics 365 and NetSuite ERP — are designed for the broadest possible audience. The idea is, these platforms can be customized to fit individual needs using a combination of add-ons, integrations, modular CRM solutions, ISV apps, and industry accelerators.
These ERPs focus primarily on financial operations and other core processes and are designed to support the entire business. Acumatica also falls into this mold, though the company markets primarily to construction firms and manufacturers. It does, however, provide a customizable, all-in-one ERP with financial management at its core.
Other ERP platforms are built to support the needs of a specific industry like manufacturing, construction, or aerospace. Some niche solutions don’t cover all of the features you’d expect to find in an ERP, so you may need to invest in more than one platform to get exactly what you’re looking for.
Obviously, this decision will have an impact on ERP costs. Generally, all-in-one platforms are the better bet, but you’ll need to look at the full picture to determine whether a specialized solution will generate bigger returns. These include:
What types of products or services do you offer? Do you sell physical products or provide services that use raw materials or parts? If you sell digital products or knowledge-based services, how are those packaged and sold?
If you deal in physical wares, how big is your supplier network? Do you need IoT solutions to manage assets, production equipment, or fleets?
Does your business model require specialized financial capabilities (i.e. project accounting or time & expense tracking)?
Do you work in an industry with specific regulatory requirements like financial services or healthcare? Will you need a solution that supports traceability or quality testing requirements?
If your organization has multiple portfolio brands or business units that operate within their own market, you’ll need to think about how to best manage everything in one platform, while also keeping entities separate from one another.
If you’re looking at a two-tier deployment, for example, you’ll likely have one ERP that functions as the “corporate hub” and several smaller “satellite ERPs” that support different arms of the business (i.e. portfolio brands or foreign HQs).
Your “main” ERP will be your largest investment, as second-tier systems extend that core functionality to each unit, while also supporting niche-specific needs. Overall, the cost of managing a two-tier system should be considerably lower than managing separate systems for each business unit.
But – the upfront costs of integrating and implementing two-tier systems are much higher than setting up a more “traditional” ERP.
You’ll need to think about how much it will cost to maintain legacy systems while you migrate each unit to the new ERP. You’ll also need to think about hardware and software costs and customizations, as well as finding the right experts to support this complex undertaking.
Until recently, choosing a deployment model meant choosing between on-premises vs. cloud-hosted solutions.
Now, cloud deployment is the default (with some exceptions). But, cloud ERPs can be offered as-a-service (SaaS deployment) or via private cloud.
SaaS deployments are the most common. Customers “subscribe” to licenses on a monthly or annual basis and software is hosted and managed remotely by a 3rd-party provider. Anyone who can pay can access cloud services – without worrying about patches, upgrades, and other maintenance costs.
Private clouds, on the other hand, offer enhanced security protections and greater control over digital assets. Orgs take on more responsibility – hosting duties, maintenance, and support, plus all associated costs. But, in return, they gain more peace of mind.
According to AWS, private cloud deployment models come in a few different flavors:
Public cloud offerings from big-name providers like AWS and Azure provide more flexibility and cost-saving benefits than any other deployment model.
Customers also gain access to top-of-the-line security protections and follow encryption standards such as HTTPS, SSL, IPsec VPNs, and more – which should be sufficient for most orgs.
But, there are instances where establishing independent, private cloud hosting makes more sense. High-sensitivity orgs like banks, healthcare providers, government agencies, or public utilities, for example, might use private clouds to safeguard against cyber attacks or better enforce complex compliance requirements.
Calculating TCO for cloud-based ERPs isn’t as straightforward as it is for on-prem systems.
Rather than looking at tangible investments like physical hardware, software, and servers (and the energy and labor involved in keeping them up and running), orgs need to consider the many intangibles that could impact costs.
According to the ERP Software Blog post we just mentioned, you should expect infrastructure to account for between 10% and 20% of your budget, and another 5% to 10% going toward database management.
With that in mind, here are a few areas you’ll want to focus on to get a baseline estimate of ERP infrastructure costs:
Hardware costs include anything associated with purchasing, maintaining, replacing, or retiring ERP hardware. This includes physical equipment like computers and servers, storage, backups, and offline databases.
If you’re migrating away from on-prem hosting, you’ll need to make room in your budget for redundant solutions.
Additionally, any on-prem systems or databases you plan on using long-term will need to be integrated with the new cloud-based system. In some cases, this is relatively straightforward. In others, it may require complex workarounds and multiple add-ons – all of which contribute to a larger bill.
In order to transition to a cloud-based system, you’ll need a reliable internet service provider, or ISP. During the implementation process, many companies invest in dual ISPs to help them avoid disruption or downtime.
For many orgs, this is a temporary expense. But, for orgs that depend on uninterrupted data streams and 24/7 connectivity, redundant networking solutions are a critical tool for safeguarding against risk.
Additionally, orgs pursuing advanced AI or IoT strategies with their ERP should look at existing networking solutions to determine whether they’re capable of supporting those capabilities. If not, they’ll need to take on that extra expense before moving forward with their plans.
You’ll need to consider the costs associated with legacy systems and data throughout the implementation process. In some cases, you’ll be able to cut costs right away.
For example, migrating on-prem databases to the cloud will allow you to spend less on server maintenance and manual upgrades.
But, other systems might stick with you for longer. As you begin phasing out your legacy systems, you’ll need to think about how to best reallocate those resources, targeting high-impact areas first. To do this, you’ll need an accurate picture of which legacy systems you’re currently paying for, which ones will be phased out, and on what timeline.
The right partner(s) will help you put cost-saving measures in place and optimize ERP ROI. That said, you’ll still need to make room for that upfront investment in order to reap whatever benefits you’re looking for.
Companies with industry-specific requirements might require extra add-ons or extensive customizations. This can make it harder to find an implementation partner and more costly, due to the added complexity.
Another critical cost center is long-term maintenance and support.
Many ERP vendors include training, software updates, and support services with some or all licenses/plans. But, the scope of that support varies considerably depending on factors such as niche needs, compliance requirements, legacy customizations, the rest of the solutions in your stack, and so much more.
Vendors often limit their support to more technical issues. Think – bug fixes, software issues, updates, and basic troubleshooting.
For example, all Dynamics 365 licenses include basic support. You can submit support tickets, email Microsoft with questions, and tap community knowledge in forums — at no extra cost. But, MS charges extra for hands-on support and faster turnarounds.
They also outsource more specialized support to their vast partner network. Support services vary by partner, but they typically include:
You can calculate the ROI for planned ERP investments with another simple formula:
(Total Value of ERP Investment – TCO / TCO) x 100
Unfortunately, calculating ROI isn’t simple at all. You’re still dealing with all the variables that determine TCO. Only now, there’s even more uncertainty in the mix because, well, “value” is relative.
Every org has its own way of defining value, as well as its own method for measuring success.
Ultimately though, it’s about measuring the potential impact of each ERP improvement against a specific set of outcomes.
Here are some of the benefits you might look for – both tangible and intangible:
For more info, check out SYSPRO’s guide, Where to Look for Tangible Benefits.
Measuring intangibles can get pretty tricky. You’ll need to come up with a system for measuring (current) ERP performance against each goal and calculating the impact of each investment/strategy. For example:
Once you’ve quantified those impacts, you’ll then plug them into the formula above to see how they stack up against TCO costs.
For more ROI info, ERP Focus’ Helen Peatfield does a nice job breaking down each of the main factors you should use to inform your calculation.
There are so many different factors that impact ERP costs, making it impossible to give orgs a straight answer without evaluating each case on an individual (and holistic) basis). Anyone who says otherwise is trying to make a quick sale.
Velosio is a Microsoft and NetSuite partner with 30+ years of ERP experience.
Depending on your org’s specific goals and system requirements, we may not be the ideal fit for your ERP project. But, whether or not you stand to benefit from our services, our experts can point you in the right direction. Contact us today to learn more about your options.