Learn about the direct and indirect costs of ERP software and how to minimize them with this comprehensive guide from Globalteckz The total cost of implementing and maintaining an enterprise resource planning (ERP) system is referred to as the ERP software cost. Businesses thinking about investing in an ERP software solution need to understand direct and indirect costs. ERP software costing includes the direct and indirect costs, from purchasing the software licenses till the implementation process is completely done. Some Direct costs are clearly manifest in this process while some are silent or hidden as per the priority example:

Customizations or new functionality development. Generally, a half-done analysis of ERP cost would just include the expenses to be made in purchasing software and hardware whereas the total cost of Buying ERP goes far beyond just these laid costs.

By a survey conducted in 2020, it was estimated that the implementation of ERP on average costs $15 Million ranging from $0.5 Million to $300 Million, however, the factors affecting the cost have not changed and more or less remain the same as they were right at the beginning. The cost of purchasing the software and the cost of installing the hardware necessary for running the ERP are two basic cost centers involved with ERP ownership. Apart from the purchasing cost the cost involved in making the system run in the form of manpower, system software, purchase of software for security features and checking third-party intrusion, license renewal fees, etc should also be taken into account.

5 Piller formula factors that are used in the actual cost

• Direct costs: The Cost which is directly related to the Processes which can be  fixed costs and variable costs
• Indirect costs: The Cost which is additional or extra costs to support a process, like administrative charges
• Fixed costs: A fixed cost is a cost that cannot be reasonable or increased. Fixed Costs refer to expenses that do not change with changes in output or sales volumes – rather, they remain constant regardless of the level of business activity.
• Variable costs: A cost that varies during the process. For example, labor charges.
• Sunken costs: This is the cost that occurs due to an error during the process

The 5 pillars of the ERP Cost

Process

The implementation process involves lots of activities and these days most of them are preferred to be done by taking the help of external consultants like functional analysis of the company to prepare an ‘as is’ document. Similarly, for technical analysis and GAP analysis services of experts or agencies are availed to get the best output and independent opinion. These services expose oneself to costs and increase the total cost of ownership of the ERP. Indirect costs in these activities are those man-hours that have been invested by the in-house staff for getting these activities done, these costs are ignored most of the time, but have a high-priority impact on the total cost of ERP implementation.

Training

To provide sufficient training, companies need to invest a decent amount of money firstly in hiring trainers or paying consultants imparting training to handle the ERP, hiring technical staff to support the ERP and training them according to the software, and hiring or developing existing managers as ERP consultants for future needs. All of these add up to the total cost of ERP software.

Integration

The cost of tools and software required for integration with external entities, for peerless utilization of the ERP, and for integration with the present system also cost and these costs vary according to the scope of implementation and ERP software itself. Some ERP software may need a lot of these tools and software and some may not.

Data Conversion

Data conversion is another activity that involves cost depending upon the nature of the ERP and the format and media on which old data has been stored. The actual cost of data conversion can be filtered only by putting together all of these factors and sometimes it can be quite high.

Testing

Testing of ERP its components, performance, and user acceptance is a compulsory process that has to be conducted before going live and this activity also obtains a cost on the company to increase the total ownership cost of the ERP.

How much does ERP software cost?

According to an ERP report from 2022, an ERP project’s typical budget per user is $9,000 per year. An ERP implementation for a mid-sized business can cost anywhere between $150,000 and $750,000 when you take into account the number of users your system may have (especially for larger businesses) and additional expenses.

This is a fairly broad benchmark, so you will need to take into account the unique needs of your company in order to plan a more accurate budget. In this comprehensive article, we’ll go over how to set a budget for an ERP system that’s right for your business as well as how much an ERP system typically costs.

We’ll make it easier for you to determine your ERP budget and the financial impact it will have on your company. We’ll cover what your ERP budget should cover, how to make a business case for financial support, how to find the right features at the right price, how to estimate the cost of your ERP implementation, and how to create your budget in this guide.

How to Minimize ERP Software Costs?

1. Conduct in-depth research by comparing various ERP software providers and solutions, so businesses can find a fit for their requirements and budget.
2. Making scalability a priority by choosing an ERP software solution that can grow with the company can help prevent the need for later, costly upgrades or replacements.
3. Negotiate with suppliers by haggling with suppliers, businesses can obtain more affordable prices or advantageous contract terms.
4. Thinking about cloud-based options of Cloud-based ERP solutions may result in cost savings on hardware and upkeep costs.

Conclusion

For businesses considering investing in an ERP solution, it is essential to comprehend the direct and indirect costs of ERP software. Businesses can maximize their investment while controlling costs by minimizing costs through in-depth research, careful planning, vendor negotiation, and consideration of cloud-based solutions.

From the above core points, Some companies may spend more money on one process and others may spend less but for calculating the actual and realistic cost of ownership of ERP all of these cost centers are needed to be included.