How do you calculate your ERP budget?

Acquiring your first ERP system or replacing an existing one requires significant budget, resources, and time. As with any major investment, the company needs to weigh up the benefits against the costs and ensure that taking the plunge will generate real added value. To define the right budget for an ERP project, the cost evaluation criteria will concern not only the initial acquisition or subscription stage, depending on the choice between SaaS and on-site installation, but also several long-term results generated by the ERP. 

In the enterprise, ERP software operates at the heart of the business, right down to the deepest data and production flows. By centralising, consolidating and cross-referencing operational data, ERP optimises numerous workflows and processes, such as producing quotations, taking orders, managing stocks, launching production, and production tracking. These optimisations are also a source of time and cost savings - but at what cost? To confirm - and defend! - the budget to be allocated to an ERP, the analysis of costs and benefits must be based on an in-depth examination of a number of factors.  

OPEX OR CAPEX: How much does the ERP cost depending on where it is hosted? 

On-premise hardware and software licences, or a subscription to Cloud service: the way in which a company accesses its ERP has an initial impact on the project cost, and each scenario corresponds to a different choice. 

When the ERP is installed on-premise, the company owns it, and its acquisition cost is included in CAPEX budgets. With this version, the company is assured of end-to-end control of its solution. The initial costs correspond to the hardware, an imponderable factor in equipping the company with the right server capable of supporting the ERP package. Of course, the cost of software licences is added to the number of users. Lastly, this acquisition cost may include variables, depending on whether the standard version of the solution is suitable for the company, or whether it requires some additional development to meet specific needs, in return for a fee. This is a point that needs to be clarified with the publisher. 

On-site installation also requires you to budget for installation costs, a service in its own right that will ensure that the solution is customised and runs smoothly. In the longer term, you need to factor in annual maintenance and related services - updates and day-to-day support - a recurring cost that is crucial to the long-term future of the investment. 

When ERP is used as a service in the cloud, it is hosted on the publisher's servers, which make it available to company users as SaaS for a monthly subscription fee, which constitutes an OPEX budget. Here, the infrastructure costs are borne by the publisher, who must guarantee that the solution is always available, up to date and maintained. But be careful: You need to assess the subscription cost for all the company users, depending on who has access to what, and which modules of the solution to include in the subscription. Precision calculation, to avoid incurring ill-adjusted costs. The publisher will, of course, support you in this evaluation. 

Some ERP costs are more indirect 

Once ERP is up and running in the company, other costs come into play. In particular, the training of users is an essential step in building their confidence in the new solution, and ensuring that the ERP is used fully and correctly. Partial or imperfect use reduces the return on investment, so it's best to budget for training once and for all.  

• Another factor to take into account is the loss of production or productivity during the transition. Here again, there are variables depending on the deployment strategy chosen. The company can choose to open the modules in stages according to priority features, or to put all the modules into service at the same time. Whatever the timing, you need to allow for a certain amount of time to get to know the system, especially as many modules are implemented at the same time.  
• Another requirement will entail recurring costs: cleaning the database to eliminate obsolete, erroneous, and duplicate data to maintain the reliability and accuracy of the analyses.  

The benefits of ERP investment

In addition to the costs, it's time to assess the benefits of ERP. The most obvious of these are the optimisation of numerous processes and tasks. Improving processes and inspections this way gives rise to improvement in performance and competitiveness, accelerates digital transformation, and optimises the management of production, customers, and sales. These benefits feed directly into the return on investment. 

Another beneficial result for the company is better organisation of the production chain, with an increase in quality. The ERP manages the match between workload and production capacity, with the ability to run simulations and schedule production. Optimised production flows reduce conflicts within the factory and improve the use of resources and equipment. As a result, a number of costs disappear, and these need to be factored into the ERP budget equation. 

With an ERP system, there are no longer any shortfalls in terms of profit, thanks to more indirect benefits. This is the case, for example, with improved customer service thanks to better product availability, the ability to adapt easily to unusual manufacturing workflows and to respond more quickly to all customer requests. An ERP system also boosts employee satisfaction, as they can devote more time to tasks that require their expertise, freeing them from the repetitive or tedious tasks that the ERP system takes care of. 

In the ERP budget, think also of the savings made  

Stocks are too low, gross requirements have been miscalculated, suppliers are poorly managed, components are invalid, a production tool has broken down, and so on: many of these scenarios cost companies dearly because of a lack of precision and optimisation of production flows and data. With ERP, these situations disappear, as do the costs they entail.  

Stock management in manual mode, it requires human time, which has a cost, and it can lack precision. So there's a risk of surplus, or conversely of certain parts running out of stock, which causes friction in the customer relationship and potentially a loss of profit. Equipped with an ERP system, industrial companies can avoid these situations and the associated costs. 

You can save time and ensure precision across many processes. Quotations are another example: the ERP system immediately integrates and selects technical data, process plans, bill of materials, catalogue data, detailed prices, and runs calculations, so that employees can generate complex, accurate quotations without delay. Once again, this automation generates a high-quality customer experience and closes the loopholes that lead to lost orders and customers. 

Final ERP budget analysis: How do you go about it? 

Depending on the project, the company must list the costs and benefits that concern it and assess them as realistically as possible. In order to shed light on the total cost of ownership and ROI, this evaluation must cover a period that goes beyond the mere commissioning of the ERP in the company. This is all the more true given that certain productivity and cost-saving benefits emerge gradually, and can only be fully quantified once the solution is fully operational. 

As a general rule, a five-year assessment is good practice - even if an ERP remains in place for much longer.