A successful ERP implementation is a long and demanding process that rests on many foundations. One of the first steps is setting a realistic budget.
Software sales folks will sometimes estimate upfront that there’s a software-to-implementation service ratio ranging from 1:1 to 1:2.5. That means if the software costs $100,000, the implementation services would be between $100,000 to $250,000. This approach is flawed from the start, especially with cloud software that is invoiced annually or quarterly and doesn’t factor in any sort of software volume discounts that might be applied.
According to Panorama Consulting Solutions, most product companies spend 0.25% to 4.0% of their annual revenue on a new SaaS (Software-as-a-Service) ERP system. Most companies participating in its study had annual revenues between $25 million and $1 billion.
This is broadly consistent with Capgemini’s experience and is a better estimation approach, although using percentages is less accurate for companies with smaller revenues. If the project is truly about changing the way the company operates by leveraging best-practice business processes and organization structures and not simply implementing a new software widget, costs will undoubtedly be higher.
In our experience, one of the biggest cost drivers of ERP implementations is how quickly clients can make decisions and how much collaboration and consensus building is required from within the organization.
Capgemini has the bumps, bruises, and experiences of a decade of Oracle NetSuite implementations. This has taught us there are key areas which can greatly impact project and implementation costs:
Data migration: Loading and performing the data mapping is the easy part. Companies often don’t budget for the creation of new data elements for establishing better ways of operating, like changing product hierarchy or adding a customer segment. These can be time consuming and costly.
Configuration: Turning on the switches takes next to no time but figuring out how to streamline and leverage best-practice business processes is where the company will receive the largest return on investment. Most of our clients want to operate differently with a new ERP system, not rely on the status quo.
Project management: Simply stated, well-run projects with rigor and discipline come in on time and on budget. The lack of strong project management on the implementation side and/or on the client side will deliver a poor project result.
Change management: Most of our clients underestimate their organizational change management needs. Process design and configuration is far and away the biggest benefit of a new ERP system, but no benefits will be realized if the organization won’t adapt and accept them. Leadership alignment and support among key stakeholders, along with robust communications tailored to different audiences, is crucial.
Technology: It’s not just coding of user interface changes, field additions, and integrations. The technology effort most include the design and testing of new development objects.
Testing: It reduces risk and significantly helps with the change process, so testing needs to be an iterative, multi-step process throughout the project.
Support: Support for the first 30 to 60 days is essential. This is game time, when the users truly are leveraging and learning how to operate the new system, so they need coaching and support. Again, it’s all about minimizing the risk and providing a safety net for the users and the company.
Optimization: It’s important to plan and budget for enhancement work after the support period. Businesses will typically want to change design elements after they use the system in production. An ERP implementation is not a single go-live event, but a journey.
So how much will you spend on an ERP implementation? Use 0.25% to 4.0% of annual revenue as a starting point and then adjust for the factors above. Budgeting your project accurately upfront means the core project team can be successful: transformative, on time, and on budget.
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Marcus Colosimo is a Market Development Executive, Oracle NetSuite Cloud Practice, at Capgemini with more than 17 years of professional ERP experience with NetSuite, Workday, Microsoft, and Infor.