When a business embarks on an ERP project, there is a lot at stake, particularly if it is the first implementation. The investment is massive. The expectation is high, and so is the risk. At the end of the day, the ultimate responsibility for project success rests with the CEO.
Most CEOs are not experts in ERP implementation. Still, their leadership and thoughtful decisions are indispensable to delivering a successful project; thus CEOs must have answers to critical questions before they commit the company’s resources to an ERP project.
Who should be my project manager?
An ERP project is very complex and requires a massive amount of work. The first, and probably most crucial, step is to select a person within your company to manage the entire project. Because that person will play multiple roles throughout the life of the project—technical expert, coordinator, organiser, decision-maker, and motivator—that person will need both depth and breadth of knowledge and skills.
This project leader normally comes from the operations or finance department and is someone who is extremely knowledgeable about the company’s operational processes. This is often the same person who has to look for, and usually fight for, the right talent within your organisation.
One of the project manager’s goals will be to foster collaboration with the vendor and with other functions of the company. Be mindful that even the most capable project leader needs top management support and commitment. If midlevel managers and staff do not see their executives rally around the project, they will see no point in doing so themselves.
Do I understand ROI?
You need to have a clear understanding of what the estimated ROI is before embarking on the project. Companies often get this wrong, as they either overestimate savings or underestimate the overall cost of the project. You may need to get an expert’s help with identifying potential benefits as well as hidden costs.
You can take advantage of vendors’ resources and expertise. Many offer free guides and spreadsheets to calculate ROI, though it is still recommended that you develop your own ROI calculations.
Some of the benefits of ERP are easy to quantify, including reduction in inventory, reduction in time employees spend doing certain activities, reduction in headcount, and fewer errors. Others are abstract and harder to quantify, for instance, enhanced customer satisfaction, improved quality, or increased enterprise-wide financial visibility. Regardless, it is crucial that you try to quantify these benefits.
It is recommended that you identify major areas for improvement, such as financial accounting, supply chain, production, and product life cycle. And for each area, there must be key metrics that can be used to calculate cost savings and net benefits. The financial accounting area’s key metrics, for instance, might include cash to cash cycle, days sales outstanding (DSO), and monthly/quarterly/yearly closing periods.
The projected ROI can then be compared with the expected total cost of ownership (TCO) to establish an economic case for the ERP project.
Do I understand the actual costs of the software?
Understanding total cost of ownership (TCO) is a critical step in selecting an ERP vendor and product. TCO normally consists of several components.
This is the price of ERP software that you have to pay upfront. This price usually varies depending on multiple factors, such as the number of modules and users (either named or concurrent users). Many ERP providers, especially Tier 1 vendors, are notorious for extremely complex pricing policies.
Some companies find it necessary to seek professional advice from independent consulting firms. Since selecting and implementing ERP is highly risky, a consulting firm’s experience and expertise can greatly mitigate those risks. This cost may range anywhere from 20% to 70% of the licence price. When choosing, make sure that the consulting firm does not have a motive to favour one particular solution over another.
ERP implementation can be costly and time-consuming, and it is unlikely that your company can successfully implement the system without an implementation partner.
The cost for implementation could even be higher than the licence fee itself. The more complex and capable the software is, the higher the implementation cost. You also need to take into account the lost productivity when your employees join the implementation activities.
Annual maintenance fee
You have to pay this amount to your vendor annually so your vendor will maintain your system and provide support. This fee is typically 10% to 20% of the licence fee.
Training is not a one-off deal; rather, it is an ongoing task. ERP is a highly complex system, and plenty of training must be done before your employees are capable of fully using the system. Additionally, an ERP system can be expected to last a decade or more, so you will need to constantly provide training for new employees.
Cost of IT
Aside from potentially having to make a significant investment in hardware (servers, clients, network devices) and software (operating system, database management), you will need IT professionals to maintain the system, troubleshoot, and support users if needed. A rule of thumb is that for every 50 users, you need one IT professional. More involved systems will require even more IT staff.
The aforementioned costs are typically associated with legacy on-premises systems. As ERP vendors aggressively move towards cloud ERP, some of those costs could supposedly be significantly lowered, or even omitted altogether.
For cloud ERP, the upfront licence and annual maintenance fees are replaced by the subscription fee. You do not need to invest in expensive hardware, and the size of the IT team required to run the system is minimised. Cloud ERP also takes less time to implement and, hence, has a lower implementation cost.
Nevertheless, with cloud ERP you have to continually pay the rental fee, which over time may exceed the cost of paying upfront for the on-premises solution, even with the on-premises system’s recurring maintenance fees.
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