How to evaluate the cost of implementing an ERP like SAP Business One
When you see your business scaling, you know it’s time you standardize some of the redundant processes that may hamper your company’s growth in near future. In such case, the first thing you would be looking out for is an Enterprise Resource Planning (ERP) system.
Like all good things come with a price, so does the ERP Implementation. Here we will discuss one of the most frequently asked questions by most Companies – How to evaluate the overall cost of implementation?
First, it’s important to understand that it’s not only the ERP software that one should consider for filling a budget sheet but also the fact that choosing the right partner and implementation methodology is equally important. And all these add up to the ‘Total Cost of Ownership’.
While there are few options available, one cheaper than the other, keep in mind that not all ERPs work the same way when it comes to recovering your investment. The key here is to identify the software that provides a well-rounded solution for your Business need(s). If you currently have a system to track your resources, finances, customers, stocks or any other aspects of business, you would have to pay an additional cost to correctly transfer information to your new ERP. SAP Business One can dynamically integrate different ERP systems, providing your Business with more flexibility. If your current system is compatible with SAP Business One, you might have a slight cost-cutting over traditional transfer methods. Your ERP Integration Partner would be able to help with this.
Subscription and Licensing
For any ERP, there is a one-time purchase cost and a recurring subscription cost, which is mostly payable monthly. You can choose between various payments frequencies that the ERP offers. One good way of saving cost is to go for annual subscriptions that may come at a discounted cost.
Number of Users
This might be the largest influencer while estimating your budget. These user licenses also come with customized packages (for example: SAP Business One offers Professional and Limited license), where the functionalities are restricted in the smaller packages and go full-out in higher packages. Having a clear focus on what would your business require would help stick to the appropriate license type.
Some of the ERPs’ come with bundled licenses, which cater to the basic business needs and are cost effective. For example: SAP Business One comes with ‘Starter Package’ – For the maximum of 5 users. It is also referred to as “lite” version of SAP Business One which includes finance, purchasing, inventory management and sales but not service or manufacturing. SAP Business One starter package licenses are $1400 per user as a 1-time cost, and $410 per user/per year for a subscription. You can talk to your ERP partner to understand which license best suits your Business type.
Any version you purchase may sometimes need minor to major tweaks to suit your business requirement. This would require purchasing additional add-ons and needless to say, kicks your cost up a notch. With many companies opting for ERPs’, the technology nowadays is more stable with most ERPs’. This can come in handy when you can slightly customize your ERP without having to upgrade to a higher license type. Such close customizations would be rare though, but choosing the right software and right integration partner would help cut down all the hustle.
This is another Influencer for your budget sheet. A robust database is essential to seamlessly store and retrieve data. SAP Business One uses SAP-owned HANA or Microsoft’s SQL. HANA being a lot faster, reliable and scalable than SQL, demands a premium over SQL. Not saying that SQL is not a database to work with; however, any two products differ in their abilities slightly or extensively, thus adding up or decreasing the cost. A larger company with extensive data resources would better be off with more powerful and secured database, while the Smaller and Medium scale Industries can still do good with more stable and generic database. The selection of database should be done keeping in mind the type of Business and its requirement.
Hardware requirement can greatly vary depending on the ERP opted for. Only your ERP partner would be able to give you the exact specification of the hardware that your ERP would sit in. The higher the requirement, the higher is the hardware intrusion and higher the cost.
The Hardware requirement would broadly be dependent on following parameters.
- Number of users
- Database used
- Connectivity (Onsite/Remote)
- Third party add-ons
- Reporting tool(s)
- Data Back-ups
A typical SAP Business One Hardware Specs would look something similar to this (for reference only):
|Microsoft® Windows Server 2012 64 Bit (x64)
|Microsoft® SQL Server 2012 64 Bit (x64)
|Standard, Business Intelligence & Enterprise Edition
|3-20 Users: 1x Intel® Xeon® E3; 21-75 Users: 2x Intel® Xeon® E3; 75+ Users: 4x Intel® Xeon® E3
|3-10 Users- 12 GB; More than 10 Users typically 12-32GB dependent on the user count
|MS SQL Server – System partition 100GB/Data partition 100GB
|Microsoft® IE 10.0 or above Microsoft® Data Access Components (MDAC) 2.6 or higher
Most ERPs’ come with built-in standard reports, but any customization to the reporting can bump up the customization cost. Most ERPs’ give you an option to integrate a 3rd party reporting tool. In such cases, the licensing fee and/or the subscription charges of the reporting tool needs to be handled separately. Some of the complex reporting would need an expert intervention. So resource cost or consultation expenses should also be factored.
Annual Maintenance Cost
When there is software, there is an Annual Maintenance to it. Most companies charge a percentage of the Software cost and may vary from company to company. Typically the cost hovers between 15% and 22%. This would be a mandated cost as the company may release new features, maintain server etc. The most approachable way is to negotiate a rate including Annual Maintenance Cost (AMC) and better if AMC is prepaid for several years, for Companies who have a heavy dependency on ERP systems.
With such complex software in place, an ERP consultation is a must. This would be probably the first few payments you would have to make from a company if you want to have the ERP software integrated. The cost is usually billed per hour in countries like the USA and fixed or monthly fees in India. Another differentiator is if the consultation is offered on-site or remotely. On-site consultation may cost higher than remote consultation. The best way to get this cost down is to have a free-trial period negotiated with your ERP partner.
Government and State Taxes
This is the type of cost which may slip from your budget sheet easily but may greatly impact the Total Cost of Ownership. You pay taxes on almost everything you buy and every service would be taxed with respect to local and State laws. In India, after the implementation of GST, any software purchase or services would be taxed at 18% over and above the actual cost. The component keeps adding up with more and more services you request from your ERP partner. Most of the quotations don’t include Tax component, making the purchase price look smaller than its final invoice. It’s always a best practice to have your ERP partner provide quotes with tax component mentioned in and as a separate line item. Helps get more transparency in final cost calculation and decision making.
For the ease of understanding, let’s break down the cost calculation that a typical ERP implementation would have. The major cost comes from Resources and License
It is obvious that the major billing would be on the number of developers used for the implementation. Depending on the business requirement and size of the Business, developers are assigned to work on the implementation.
While the developer’s job is to make the ERP ready for implementation, a functional architect would act as a face of the ERP Partner Company. Many stable ERP companies would bet big on the functional architect as they are the key resource between client’s requirement and software development. The better the functional architect, closer is the software to business requirement.
Dealing with a specific Industry needs a specific Industry expert. The goal is to provide more insights to the ERP tool with respect to Technical Development to comply with Industry standards. This role is taken mostly on consultation and may not include a full-time package; however, Industry Experts do not come at lower pay.
Team Lead or Coordinator
Another face for the company, a team lead or coordinator is required to see that the overall cycle of requirement – functionality – technology – Industry falls into place. It’s a Project Lead who ensures that the start to end process is carried out in the promised timeline and also the payments are received per milestones.
If the Business is too large (or) if the Business requirement is vast, an experienced project manager is added as an extra layer of security. Again, this role may or may not be full time depending on the size of the project. A project manager might be called in during a firefight scenario and can be paid as per consultation.
This is a straightforward cost payable to the ERP provider like the SAP. As discussed above, these user licenses come in bundled packages and offer features with a premium on it. Most ERP providers have a basic and advance version, but some may include additional features and can have few more extensions.
Let’s look at 2 scenarios to identify the expected overall cost. We would consider a Bottle Manufacturing company (XYZ Corp) and a Distributor company (ABC Corp), which purchase and sell plastic bottles from XYZ Corp.
Scenario 1. ERP Implementation for ABC Corp
A Product Distribution Company would have lesser operational cycles and shouldn’t be tricky to be put on an ERP system. The cycle would include Purchase, Inventory and Sale. We assume that the company is fairly small and operates in 3 regions only.
Estimated Delivery – 6 Months
- Resource Utilization
- One Functional Analyst with 100% involvement with a salary of 40,000/- per month for 6 months
- Two Software Developers with 100% involvement with a salary of 20,000/- for 6 months
- One Team lead or Project Coordinator with 70% involvement with a salary of 50,000/- per month for 4 months
- License type
- Basic – INR 2,00,000 (for 3 users)
- (Considering 1 license for each target location)
- ERP Partner’s Overhead cost – 40% = INR 3,36,000/-
For a ballpark, company ABC Corp is likely to shell out approximately INR 12,00,000/- for end-to-end implementation. Please note that this doesn’t include the recurring Annual License Renewal cost and Annual Maintenance Contract.
Scenario 2. ERP Implementation for XYZ Corp
Things would be different with a Manufacturing firm as compared to a Distribution firm. There are multiple layers of data flowing and would require more than a Basic license to onboard onto an ERP system. We assume that this Manufacturing Company is a medium scale industry with a couple of production lines and operating across 3 different locations.
Estimated Delivery – 10 Months
- Resource Utilization
- One Functional Analyst with 100% involvement with a salary of 40,000/- per month for 10 months
- Five Software Developers with 100% involvement with a salary of 30,000/- per month for 10 months
- One Team lead or Project Coordinator with 100% involvement with a salary of 50,000/- per month for 10 months
- One Industry Expert with Consultation based with a fees of 80,000/- per month for 3 months
- License type
- Basic – INR 2,00,000 (for 3 users)
- Advance – INR 4,00,000 (for 3 users)
- ERP Partner’s Overhead cost – 40% = INR 13,00,000/-
For a ballpark, company XYZ Corp is likely to shell out approximately INR 46,00,000/- for end-to-end implementation. Please note that this doesn’t include the recurring Annual License Renewal cost and Annual Maintenance Contract.
While this is only a well-thought estimate, the real-life scenario could be way different. There are multiple factors which would affect the overall cost – like:
The region of Implementation – Resources are much costlier in the developed markets like the US and Europe. The third world countries provide resources at much cheaper rates, but the quality of the outcome is something to be looked forward to. India, currently, is a potential go-to-market which offers the right balance of cost and quality.
ERP Partner’s overhead cost – The above break-down shows only the true cost that an ERP partner company may incur. An overhead on the cost is applied for resource maintenance, operational expenses, Infrastructure and profits. Every ERP partner to his own.
License Type – In our estimate above, we only went with the base cost of SAP Business One bundled license for 3 users. Additional users would need to be added in at INR 1,20,000 per user for Basic and around INR 1,40,000 per user for Advance license type.
Resource involvement – For larger and scalable businesses the requirement can be critical. Also, the time frame of integration is also a crucial agenda. So, a tighter timeline might involve more number of skilled resources, thus shooting the cost up by a margin.
With such complex software integration and numerous factors influencing the TCO, it’s really difficult to get a close estimation of the cost of implementation. But if we have to sum up the discussion, expect INR 5,00,000 to INR 50,00,000 per year, for small to medium scale industries, in India. While this would be the cost for implementation only, your business would be greeted with recurring Annual costs at the rate of 15% – 25% of the overall cost, as the years pass by.
If a company defines a clear requirement, they can have clarity on 70% of the cost. The rest 30% would always be in question, and we are not complaining.