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Home ERP Software Cost – Direct And Indirect Costs

ERP Software Cost – Direct And Indirect Costs

Whenever any organization plans to implement ERP software there are many factors that needs to be taken care of some of them include ERP selection Functions customizations Vendor selection and finally the most important one Direct and Indirect cost while implementing any ERP solution. Costs factors are one of the main reason for finalizing the decision ERP software.


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 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 the error during the process


The 5 pillars of the ERP Cost

The 5 pillars of the ERP Cost



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.


To provide sufficient training, companies need to invest a decent amount of money firstly in hiring trainers or paying the 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.



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 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.



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.





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