An ERP for a small business costs from US$5,000 a year for an annual licence subscription. An ERP for a large enterprise or government organisation can cost US$1 million a year or more.
The typical small to medium business pays between US$20,000 to US$100,000 a year. The market for ERP software is divided into multiple tiers, with costs rising with the capabilities of the software.
However, a business looking to move to ERP needs to budget for much more than the cost of the software itself. There are three areas of cost; software, implementation and personnel or HR.
Software cost of ERP
ERP isn’t sold as a fixed monthly subscription. The software cost of an ERP is calculated on at least three factors; the number of modules, the number of users and connections with other software.
Cost of modules
An ERP consists of several modules that drive different areas of a business. The base module is usually finance and accounting; the annual subscription cost increases according to the number of modules required.
Some modules will have standard and advanced versions, with the latter costing more. Some ERPs have different “editions”, which include major changes in functionality. Oracle NetSuite’s OneWorld edition, for example, gives a company the ability to run multiple entities in different countries, and can manage multiple tax jurisdictions, currencies and languages.
Cost of users
ERPs charge a base price for the modules and an additional fee for each user. There can be different types of user licences, from standard users to restricted access users. The number of users for an ERP is usually much higher than accounting software.
Accounting software typically has only a few users; the finance team, an external accountant or bookkeeper, and a business owner or managing director. While others in a business may need to see reports produced by accounting software, these reports are often produced by the finance team and sent to the requester.
An ERP is different. Many companies use an ERP to run all parts of the business. This means that nearly everyone in the company, from front house staff to the pickers and packers in the warehouse, has a login to a personalised view of one or more modules.
Sometimes an ERP is only used as a financial engine, with operations staff using specialised applications that report back to the ERP. This approach can also form part of a change management strategy to gradually move staff from existing systems to the ERP over time.
A company moving to ERP for the first time should budget for licences for every user that requires information from an application to fulfil their role. Customers and suppliers who need access to an ERP portal to see invoices don’t require licences.
Cost of connections
The third software cost of connectors to other software. ERP vendors or their partners sell pre-built connectors to popular marketplaces and business software. Common examples include e-commerce platforms such as Shopify and Magento or productivity tools such as Microsoft Outlook and Excel.
If a suitable connection doesn’t exist, the ERP partner or vendor can build a custom integration to most business applications. This integration expense is billed as software development and falls under the general cost of implementation.
Other factors that affect cost
ERPs track a number of usage metrics to segment pricing into different tiers. File storage and transaction volume are common factors. For example, Microsoft Dynamics Business Central increases pricing tiers in its e-commerce module based on the average order value and volume of transactions, as well as the number of transactions under fraud protection.
Implementation cost of ERP
Setting up an ERP for a business is not as simple as flicking a switch. It involves a lot of planning, discussion, reviewing and changing processes, configuration of the ERP and sometimes software development.
As a guide, an implementation can cost two to three times the annual subscription licence for the ERP software. The amount can vary widely depending on how many modules the company wants to install and the level of customisation required.
An ERP implementation project contains several stages, and three can have a major effect on the total cost.
Cost of customisation
Historically, customising an ERP has been the single greatest driver of cost and risk in an ERP implementation. Once a company starts adding or changing features in the ERP itself it adds a permanent cost overhead. Whenever the ERP receives an update, the company has to test all its customisations to see whether they still work. If not, the company needs to rehire the software developer and update the code directly.
For this reason, most modern ERPs include many levels of configuration options. If a company can meet its needs by configuring the ERP correctly, then any updates can occur with no impact on the stability of the software.
Another alternative to customising the ERP’s code is to build a custom application that connects to the ERP through its data interface, or API. Any updates to the ERP could break the connection through the API, but this is easier and less risky to fix as the ERP itself will continue to operate.
The cost of customisation comes down to the number of software developer hours required, which is determined by the extent of changes. Heavily customising an ERP can cost hundreds of thousands of dollars; a minor modification can cost tens of thousands.
Cost of software integration
As mentioned above, if there is no pre-built connector to move data between your ERP and critical business applications, your ERP vendor or partner will need to build one for you. Even when a connector does exist, sometimes it lacks the functionality required to match business processes.
The cost of an integration varies, depending on how well the applications were designed for sharing data. Most modern ERPs have robust, sophisticated data interfaces for exchanging data with other applications (this is called an application programming interface or API). Older business applications may lack a well-built API. These situations will require more time with a software developer to build a stable, reliable solution.
Cost of training and support
Another hidden cost in buying an ERP is the effort required to help staff change the way they work. A company that decides to implement an ERP to manage its finances only may get away with retraining just the finance team. Many implementations affect operations staff too, which means running training sessions for employees in warehouses, line managers, back office and front office.
It is not uncommon for staff to resist change in poorly led implementations. If the leadership team fails to explain the project and lead by example, then employees may revert to old ways of working such as maintaining critical data in spreadsheets. This can lead to duplication of effort, duplication of data and a breakdown in operations.
Change management is an essential aspect of an ERP implementation yet is often underfunded. The most powerful ERP is worthless if no-one is willing to use it.
Personnel cost of ERP
There are indirect costs associated with an ERP implementation, particularly for smaller companies that run a lean finance team. Accounting software such as Xero and QuickBooks Online are very effective at streamlining accounts payable/receivable tasks such as bank reconciliation, running payroll and invoicing customers and suppliers.
ERPs can also automate finance and accounting activities. However, due to their size and complexity, they usually require permanent finance staff to become experts at configuring and running the software.
A small business moving to an ERP typically would need at least two full time employees in the finance team. Otherwise, the business won’t be able to realise the full benefits of the ERP, such as creating detailed operational reports and finding ways to optimise financial performance.