Choosing an enterprise resource planning (ERP) platform is complex, as different applications often have very similar functionality, but different fundamental technology and licensing models. These variables make direct total cost of ownership (TCO) comparisons difficult when selecting a product. However, this document will present scenarios and specific cost categories to help you make a more informed ERP decision.
There are many ways to evaluate ERP options. Return on investment (ROI) is one method to compare platforms, taking future benefits, cost savings, revenue growth and out-of-pocket costs into consideration. However, quantifying these benefits is highly speculative. This white paper focuses on costs, which can be more objectively identified.
TCO is a measure of the total cost of purchasing, or in the case of cloud computing, subscribing to, and of operating an application over a defined time period. TCO provides a realistic and holistic measure of the costs required to acquire and operate business applications. Identifying these expenses allows companies to compare one solution to another and allows management to weigh costs against expected benefits of an application.
When considering an ERP implementation, organizations are often aware of licensing costs related to potential solutions, but other factors that should go into a calculation are often overlooked. ERP selection is an intricate process with implementation and hardware costs to consider, as well as backup systems and employees to support the application. These sometimes hidden costs must be accounted for to have an accurate TCO comparison.
An important metric to consider when making a comparison is your timeframe. If you are looking at initial costs, a cloud solution may appear to be more cost-effective, as it does not require a permanent license. However, your projections should be forward looking, and as the timeline lengthens, expenses start to even out. A useful comparison should look at least two years in the future, depending on the volatility of your business.
If you are a startup, it may not be beneficial to project further than two years, as your business model and plan can change significantly to adapt to market conditions. A more established company can afford to extend their projections; however, it may not be wise to forecast the needs of the business beyond five years.
An ERP solution may be deployed on the organization’s own computing infrastructure (on-premise), hosted by a service provider or may be a native cloud system. Regardless of the deployment method, an organization will pay for everything from disk drives to databases to the application itself.
However, these costs may be bundled into provider fees. The chart below details where you will typically find the various costs involved in an ERP system.
Prepared by: Matt Kenney, Principal, RSM US LLP