Page 26 - MetalForming August 2011

Factors
Affecting ERP Implementation
Costs
BY FRANK SCAVO
What Drives Implementation Cost?
I have been in deals where software vendors basically have offered to sell the software at little or no cost. Does that mean the vendor or system integrator will support the implemen- tation for little or no cost? Of course not.
This thought experiment essentially proves that the rela- tionship between software cost and implementation cost is not direct. Rather, based on our ERP selection and imple- mentation project-management experience at Strativa, we find that total ERP cost is affected by a number of factors.
• Software often is priced by the number of users, which also is a factor in implementation cost. More users general- ly means more user functions affected, more business processes affected and more training required.
• Similarly, software often is priced by the scope of func- tionality included. Software with more functionality gener- ally is more expensive than software with less functionality.
In addition, several other factors affect implementation cost but generally do not affect software license cost. These include the following:
• An organization that can implement the new system clean- ly, without a lot of data conversion from the old system and with- out building interfaces to legacy or third-party systems, will get by with a much smaller implementation budget than will an organization that requires excessive data conversion or inte- gration.
• An organization with well-defined business processes, and that conform to the business processes defined in the software, will generally pay less for implementation than will an organi- zation that needs a lot of business process change.
• An organization that has a well-formed internal project team with skilled resources will generally pay less for imple- mentation than will an organization that depends mostly on outside contractors to undertake implementation activi- ties. The organization with a well-formed team also is at less risk of project failure.
• Choice of the implementation consulting partner. An organ- ization that engages the help of a qualified system integrator—
The CEO of a small software vendor contacted me with a simple question: Did I know of any recent research that provided typical ratios comparing Tier II ERP- implementation cost to software-license cost?
My reply was simple. I wrote:
Dear XXX,
Unfortunately, I do not have current stats on the ratio of implementation to license-fee revenue. It is something we should survey, as we do get asked this a lot. I usually quote a range from about 75 to 200 percent, typically. But as you can imagine, discounts on the software-license fees affect that, as do the extent of data conversion and interfaces/integrations and modifications. Also of note is the amount of business change being introduced.
A few moments later, I tweeted a short status update.
“Chatting with a vendor about implementation cost to soft- ware license cost ratios.”
That triggered an interesting three-way discussion between myself and two other ERP experts: Dennis Howlett and Martijn Linssen. Martijn’s position is that “there is a clear, direct and fair- ly linear relationship between the initial cost of a product (soft- ware) and the additional cost(s) involved in servicing it.”
While I agree with Martijn that there is a relationship between the cost of the software and the cost of implementa- tion, I do not agree that it is a “direct relationship.” For exam- ple, if company A pays more for software than does company B, you can expect company A will pay more for implementation. This might be because company A has more users or is installing more modules. These factors will cause the software cost, as well as the implementation cost, to be greater for company A. But what if the software vendor greatly discounts the software cost for company A? Will that bring the implementation cost down for company A? Of course not.
Frank Scavo is a principal analyst with Constellation Research (www.constellationrg.com), and a cofounder of Strativa, a Cali- fornia-based management consulting firm providing independ- ent advice for business and technology decisions.
MetalForming/August 2011
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