ERP implementations remain one of the most complex and expensive IT projects for large enterprises. A recent report from Software Path found the average budget per user for an ERP project to be $8,265. Other data suggests ERP implementation costs for large enterprises start at $1M to $10M and up to 200 percent of license fees, and go up from there.
In this blog, we are using the term “implementation” broadly to encompass both technology and services costs for first-time or replacement ERP projects. With so many IT dollars on the line, many IT and IT procurement leaders are seeking ways to rein in the cost of their ERP implementation projects. In this blog post, we share six pragmatic ways enterprises can reduce ERP implementation costs and ensure they receive maximum value from their technology and implementation partners.
ERP Implementation Costs: 6 Cost-Reduction Solutions
Determine Accurate User Counts with Future-State Requirements in Mind
Subscription fees and/or license fees will be a large chunk of your ERP implementation spend. While it’s tempting to only license for what you need today, it’s important to anticipate changes in user counts over the next three to five years. Building those projections into your initial scope may give you leverage to negotiate additional users at a lower price point than you would pay if you added them on the fly down the road.
Another best practice is making sure you segment users into different profiles based on usage requirements. This analysis allows you to determine which users truly need a “power user” license (typically at a higher cost) and which are better suited to lower-cost license types.
When determining user counts, also keep implementation and roll-out timeframes in mind. Your vendor will likely push you to start paying for all users on day one. Consider “ramping” up to your full user count over the term based on how long it will take to get the solution implemented across the enterprise. The goal is to not start paying for all users until the solution is fully implemented and rolled out.
Demand Line-Item Pricing Visibility
Vendors love bundled pricing. It obscures their pricing strategy, while giving customers one number to process. But, as we often say at NPI, mystery equals margin.
There are a number of elements to an ERP implementation project – license/subscription counts, training, data migration, support, configuration, customizations, integrations, add-on features/modules, and more. Bundled pricing makes it difficult to understand how much you’re paying for each element and if that price is fair (more on that in the next section).
Our advice is to demand line-item pricing in each of your vendor quotes. This data will help you better understand the cost of each element, identify savings opportunities, and produce a true apples-to-apples comparison for competitive evaluation.
Benchmark Pricing – One of the Most Effective Ways to Reduce ERP Implementation Costs
Now that you’ve got accurate user counts and line-item pricing, it’s time to determine if you’re being quoted a fair price by your vendor. Keep in mind what your vendor quotes you can be significantly more than what they may quote another customer with similarly-scoped requirements, and significantly more than what another vendor with similar functionality will charge.
Performing IT price benchmark analysis often reveals material savings – seven-figure savings are not uncommon for large enterprise ERP projects.
Leverage Your Vendor’s Cloud Roadmap
The future of ERP is in the cloud. And that’s generating a whole new crop of ERP implementation projects for customers old and new. Legacy vendors are highly motivated to migrate customers away from on-premise solutions to cloud offerings. Similarly, many enterprises are adopting a cloud-first IT roadmap and are eager to bring critical business systems into alignment.
In some cases, the deal window is still open for customers looking to leverage their vendor’s motivation– agreeing to move to the cloud may make room for better pricing and other concessions across other portions of the vendor’s footprint. Regardless of how open the window is, customers need to align their IT roadmap with that of their ERP vendor. Not getting on board at the right time can lead to higher costs in the long term.
Right-size Professional Service Resources and Aggressively Negotiate Rate Cards
Accelerated transformation, cloud migration, and heavy-lift solution implementations and upgrades have caused services spend to spike with vendors like Capgemini, Infosys, Deloitte, Accenture, Cognizant, TCS and others. NPI’s data shows enterprises overpay 10 to 25 percent above market for certain service rate card line-items.
It’s imperative that customers do two things in advance of an ERP implementation to reduce overspending risk on services. The first is to right-size resources to specific project/task elements. The most expensive resources should not be performing tasks that a lower-cost resource is qualified to provide.
The second is to perform IT price benchmark analysis on professional services rate cards. For those customers with material spend across multiple service providers, another option is the creation of simplified rate cards (SRCs). By standardizing and categorizing roles, and establishing pricing targets based on roles and experience levels, some clients have reduced aggregate fees for planned projects by as much 25 percent.
Beware of Custom Solution Implementation Pricing
Out-of-the-box ERP implementations are rare, but your “custom” solution may not be as custom as you think. Some SIs and implementation partners use templates that divide the total proposed hours into predefined percentages of the various resource levels – whether you actually need those resources or not.
To reduce ERP implementation costs, we echo the advice shared above – challenge the need and deliverables for each resource type to ensure you’re paying for only the resources required.
NPI Helps Customers Materially Reduce ERP Implementation Costs
There is ample opportunity to make significant reductions to ERP implementation fees. NPI’s IT price benchmark analysis services help customers break down the complexity of ERP implementation pricing and determine pricing targets that are at or better than market. We also provide negotiation support to increase leverage and secure the most favorable outcome possible during vendor negotiations.
If you have an ERP implementation on the horizon, contact us. Our IT pricing and negotiation analysts can help you identify material savings opportunities.
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