Total Cost of ERP Ownership Analysis

Enterprise Resource Planning systems normally involve high costs and have a long term consequence on the functions of the organization. Therefore proper planning is required before the implementation of ERP. A lot of risk is also involved in the implementation of the ERP system and so a Total cost of ERP ownership analysis can be very useful. Total Cost of ERP or TCO starts with estimation of the indirect and direct costs that will be involved during the ERP project beginning with the implementation to its replacement. The future costs have to be based on some assumptions. By estimating the Total cost of ERP ownership, the company can take proper decisions regarding the costs at the beginning of the ERP project and thus manage the future costs.

The ERP system being implemented may be altered or customized. These alterations prove to be expensive and should be minimized in order to control the Total Cost of ERP ownership. The company should be ready for modifications but try to limit it according to the needs else it will increase the TCO over time. The costs of an ERP ownership include the cost of the hardware, software, services, maintenance, customization, etc. The hardware costs include the purchase of the computer hardware, network equipments, etc. It depends on the scope of the project and the implementation. The software cost depends on the complexity and the scope of implementation. A major portion of the services costs involve the cost of customization of the ERP software. Other service costs include the integration of data, testing, training. The Total Cost of ERP ownership is the main factor in the ERP strategies and decisions and it is important to calculate the TCO to avoid surprise costs through the process of implementation.

To calculate Total cost of ERP ownership one has to be specific about the requirements so that there is no ambiguity for extra costs to creep in. The vendors should be specific too by fixing costs for the activities. A board room pilot is a good way to ensure that all costs are defined prior to the purchase of the ERP software. All the direct costs and the indirect costs should be included. The future costs should also be taken into consideration and all this should be included in the contact details. Limit the alterations and customizations. Another way to break the costs is by implementing the ERP software phase wise. This way the critical processes can be done in the initial phase and vendors can quote phase wise. The Total Cost of ERP ownership and the benefits are related to the life cycle factors of the ERP system.

TCO is just not about cutting costs or the IT platform with the lowest TCO is not always the best choice. It is about the right services at the right prices and TCO is only a part of the total policy making process and many other factors are involved. The total cost of ERP ownership is an important for assessment of the different costs involved in the various phases of the ERP life cycle.