Abstract
This white paper discusses the 6 Key Decision Drivers
that you should consider as you evaluate ERP software
products.
These 6 criteria are:
-
Functionality
-
Technology
-
Software
Vendor
-
Implementation
Vendor
-
Support &
Maintenance
-
Total Cost of
Ownership
If you ask the
right questions of software vendors you will collect the
right information to make an informed decision when
selecting an ERP solution. The software should provide
you with more than a basic functional fit, it should
provide a strategic advantage to drive efficiency and
expand your business. You are buying a tool that you can
use to support the business functions of your company
and give you a competitive advantage. Because the
technology business environment is constantly changing,
evaluation of the software vendor is as crucial as the
evaluation of the functionality. The right
implementation partner brings experience, industry
knowledge, best practices, and technical capabilities to
the table. You should regard your ERP software as a key
component of your organization that requires care,
maintenance, and upgrading. By focusing on what you need
and understanding the total cost of ownership of your
software options, you make sure you pay the right amount
for your software. When all six decision drivers are
used, you gather the information you need to give you
confidence that you have made the right decision.
Introduction
The
process of selecting enterprise resource planning (ERP)
software can be a daunting task. How can you be sure
that you are selecting an ERP solution that is a good
fit for your company? Soft Resources has spent the past
15 years assisting hundreds of organizations of all
sizes through their software selection process. Through
this experience we have found six key decision criteria
that drive an organization’s software decision. Although
there are never any guarantees that you will have a
successful project, if you ask the right questions of
software vendors you will collect the right information
to make an informed decision, enabling you to maximize
your chance to successfully select and implement the
right ERP system for your company. Modern ERP systems
offer expanded functionality, advanced technology, and
enhanced reporting. A properly selected ERP system can
be a strategic asset for your company.
The
6 Key Decision Drivers
You
know that when you change the tire on your car you must
follow a logical method in order to make sure the new
tire is properly attached. First you loosely tighten one
lug nut, then tighten the opposite lug nut, continuing
until all the lug nuts are loosely attached. You then
follow the same pattern to tighten each lug nut in turn
until they all fit snugly on the wheel. The six key
decision drivers are like the lug nuts on a wheel in
that you must continually ask questions as you
investigate software. Just like gradually tightening
those lug nuts, you gradually gather the information you
need for each of the drivers as you go through the
selection process. At first you will get high level
information, but as you proceed through the software
evaluation process, you “tighten the lug nut” as you get
more and more information in your effort to select the
best software fit for your company.
Software
Functionality
Software functionality is the set of decision criteria
that most people think about when they embark on a
software evaluation process. The software must meet your
basic functional requirements in order to be a useful
tool for your business. Ideally, the software should
provide you with more than a basic functional fit, it
should provide a strategic advantage to drive efficiency
and expand your business.
Functional
Footprint
The functional footprint is the scope of modules and
functionality that is offered by a software vendor.
Every ERP software product has a unique functional
footprint. For example, one vendor may offer financials,
manufacturing, distribution, and HR/payroll
functionality, while another may not offer HR/payroll
but does offer CRM capability. The footprint the
software vendor you select offers should match your
required functional footprint.
ERP software
vendors expand their functional footprint with the goal
to be a “one-stop-shop” for all functionality a company
might require. Although no ERP software will ever be a
100% fit to every company, software vendors have been
working to increase functionality in their systems in
six different ways:
Development.
ERP vendors employ programmers who continually expand
and develop new functionality. Many new functional
enhancements are driven by user groups that request new
capabilities from the system. This is the most time
consuming method to add functionality and can be costly
for the vendor
Enhancement.
In the past, “enhancements” meant creating extensive
customizations to the core software which more often
than not kept it from being updated easily, or “taken
off the upgrade path.” Now, using more flexible software
products, vendors are offering “modifications.” This
means that enhancements can be made that increase
functionality while the core software remains on the
upgrade path
Acquisition.
ERP vendors whose core system lacks specific
functionality acquire other software vendors that have
it. Be aware that if the acquired software was not
written with the same toolset as the core ERP or doesn’t
use the same database there may be integration problems.
We find that it usually takes at least a year after an
acquisition for a vendor to integrate its acquired
functionality with its core system.
Partner.
Partnering with other vendors is typically done for
certain functionality that does not always require tight
integration to the core ERP system such as CRM, payroll,
and HR. If you are considering partnered software, you
need to make sure that you are not one of the first
companies to make the integration. Find out how many
times the software packages have been implemented
together.
Independent software vendors (ISV).
ISVs offer solutions that round out the functionality of
a core ERP system for certain industries or
functionality. ISVs build applications that link
directly to the full ERP application and, unlike
third-party applications, are developed using the ERP
vendor’s toolset. The solution is tailored specifically
for that system, making for a tighter integration. The
larger ERP software vendors typically have a long list
of ISV solution providers. You should consider this list
if you are in need of some advanced or industry-specific
functionality.
Best-of-breed.
Many software vendors sell specialized software that can
interface with your ERP or other applications. For
example, a vendor that specializes in CRM software will
strive to produce the best software of the CRM “breed.”
SaaS vendors are more likely to use this method to
expand their functional footprint and will typically
offer software developed by one of these third-party
vendors through their Web sites. You can round out your
functional footprint by choosing from among the many
best-of-breed applications on the market.
Your goal is to find a way for the software to handle
all your functional requirements in an integrated
manner. If the software is not functionally capable or
is poorly integrated, you should consider eliminating it
from your list.
Software-as-a-Service
Software-as-a-service (SaaS) refers to Web-based
applications provided by application service providers.
Customers access the application over the Internet
through their Web browsers. The applications maintained
and updated at the server level by the application
service provider.
SaaS is subscription-based, usually paid for through
monthly fees. Similar to standard software license fees,
SaaS monthly subscription fees can be based on number of
users, number of login names, degree of access per user
or login name, depending on the software vendor’s
business model.
The principal
benefits of SaaS include reduced number of IT support
personnel and reduced need for IT hardware
infrastructure. SaaS subscription fees are usually
charged as an expense rather than a capital asset with
an onsite implementation. This can be either a benefit
or a drawback depending on your specific situation.
The SaaS model
works well for companies that have multiple locations or
have employees that have a need to access the system
from the road. It also works well for certain
departments such as HR/payroll, and sales (CRM). It is
important to keep in mind that SaaS, like standard
on-site software implementations, has implementation
costs that include set up, integrations, data
conversion, and training.
SaaS is
gaining momentum in the market, but there are some
things to keep in mind as you evaluate if SaaS is right
for you. Remember that you do not own the software, but
you do own the data on the software so you want to make
sure you have a plan for moving the data if you should
need to change vendors down the road. You should closely
evaluate your configuration and implementation options
including any integration issues with third-party
systems that may need to be resolved. Finally, make sure
you consider the total cost of ownership of the software
over at least five years.
Industry-Specific Functionality
Every industry has industry-specific requirements. The
ability of ERP vendors to handle these requirements
should be carefully evaluated because they can be a
major differentiator in your selection process. You
should evaluate both general ERP vendors as
well as industry-specific vendors. Industry-specific
vendors are very functionally focused and already
understand many of the issues you need to resolve.
General ERP software vendors, on the other hand, do not
focus on any particular industry. They are typically
more advanced with regard to technology and
functionality common to all industries such as
financials, but lack the requirements for specialized
industries. ISVs are a great way to add
industry-specific functionality to a general ERP
package. ISV functionality may include retail,
e-commerce, maintenance management, manufacturing,
warehouse management, distribution, or a host of
additional functionality.
Unique
Requirements
Remember, every company is unique. We have found that
often companies in the same industry end up selecting
different software solutions because they have different
needs and requirements. Do not assume that just because
somebody else in your industry uses a particular
software solution it will be right for you, too.
Also keep in
mind that there is no perfectly functional software
available that will handle all your requirements. You
are lucky if you can get 80% of what you are looking
for. Although the basic functionality vendors offer is
the same, their focus and capabilities vary widely when
applied to certain industries or types of companies.
Here are some key questions to ask as you evaluate a
vendor’s functionality:
-
Can the vendor
handle your most important functional requirements?
-
What
industry-specific functional requirements will be
necessary in the future? Can the vendor provide that
functionality now? If not, do they have a path to get
there?
-
Does your
functional footprint match the software vendor’s?
-
What
third-party add-ons or ISV solutions may be necessary to
round out your functional requirements?
-
What strategic
advantages does the software bring to the table for your
company?
-
What
enhancements may be necessary to make the software work
for your company? Will these enhancements take you off
the upgrade path?
The following
graphic shows the advantage of using a VAR that can
implement industry-specific enhancements that have been
written using the ERP software’s toolset. You are able
to add functionality that operates together in the same
database as the ERP software and uses a common user
interface. From the perspective of your users, the final
result looks like a single, totally integrated
application.
Software
Technology
The
most important thing to remember as you evaluate
technology is that you are not buying technology for its
own sake. You are buying a tool that you can use to
support the business functions of your company and give
you a competitive advantage. Therefore, although
technology is a strong consideration in the evaluation
of ERP software, the functional needs of your company
should drive the selection process.
The IT
Environment
The
first thing to consider as you evaluate technology is to
look at your current technology infrastructure and IT
capabilities. This may include hardware, operating
systems, database, and IT staff expertise. Consider the
following:
Current
technology platform.
Can you leverage your current systems and hardware for
the selection and implementation of a new application?
Is your technology so outdated that you will need to
replace your platform no matter what? If you are
considering SaaS, hardware is less of an issue than with
onsite systems, but keep in mind that your desktops will
have to meet minimum system requirements and you will
need a very stable Internet connection with large
bandwidth.
Expertise
of IT staff.
What technologies is your IT group proficient in? Will
you be able to retrain current staff, or will you need
to
hire new people to adapt your company to a change in
technology such as SaaS? You will want to make sure the
technology you implement has significant technical
resources available to you: If you select a system that
uses an uncommon technology whose support resources are
difficult to find, it will be difficult to maintain.
Industry
IT requirements.
Certain industries have very important technical
requirements. For example, wholesalers are often
required to communicate with the retail outlet via EDI
or e-commerce. How the software vendor handles this
technical requirement may be a key factor in the
selection process.
Once you have
a good idea of your internal capabilities and direction
you can begin to evaluate the software vendor’s
technology
Forward-Looking Technology
As
you evaluate your technology options you want to make
sure that you select a technology that will enable you
to move forward for at least the next seven to twelve
years. There are a number of concerns surrounding
implementing older technology that is not being
continuously improved:
-
The ability to service your customers adequately in the
future
-
Difficulty finding resources and personnel to support
your technology in the future
-
More difficult reporting associated with older
technology
-
Limited user interface options.
The main idea
is to implement a tool that can be used now and in the
future, and that will enable you to use technology as a
strategic advantage.
Development
Tools
You need to find out what tools were used to develop the
software. Is it proprietary or is it an open toolset?
Either would work, but make sure you will easily be able
to make customizations and enhancements to the software.
Will you be able to find people that can make
customizations using the toolset provided with the
software? Similarly, your software vendor or reseller
should have
some capability to create enhancements using the
software’s toolset. What capabilities does the software
vendor offer to make enhancements?
Integration
Depending on the size and complexity of your company,
there may be other systems the ERP must integrate with.
What integration tools does the software use? Are they
compatible with the technologies of the ancillary
systems the ERP needs to integrate with? Application
program interfaces (API) are often used to connect
systems. Does the software have open APIs?
Another key
integration that directly impacts users is integration
to desktop tools that enables them to manipulate data
and produce reports. You should evaluate the level of
integration offered by the ERP vendor with desktop tools
such as word processors and spreadsheets. End users are
very interested in the ability to link to spreadsheets
and other office productivity tools.
A key issue to consider when integrating your system to
ancillary systems is how upgrades affect the
integrations. As you upgrade your systems a see-saw
effect develops. When one system is upgraded, you need
to make sure that the links to the other systems are
updated. Then, when the other systems are upgraded, you
once again need to make sure that the links are
upgraded. This can make for a difficult environment for
your IT staff to maintain. You need to keep the see-saw
effect in mind as you evaluate your system options. Ask
the vendors what similar environments they have
implemented in and how they resolved this issue.
Personnel
When you have completed your evaluation of your current
internal IT strengths and platform, you need to consider
the impact on personnel of moving to a new technology
versus staying on the old one. The effects of moving to
a new technology will not only be felt by the IT
department, but users will feel the difference as well.
You need to consider the impact of any change in
technology to the entire organization. For example, a
change from AS400 to a Windows environment will bring
both good and bad changes that will permeate your
organization in areas such as reporting. While many
users like the rapid hotkey data entry of older software
systems, you will have to weigh that preference against
the much improved reporting capability of new systems.
Peripherals
With the implementation of new technologies comes the
ability to add efficiency enhancing peripherals such as
bar code scanners, handheld radio frequency devices, and
other hardware that may be useful to your company. You
can take advantage of these technologies to improve
operational efficiency on the shop floor, warehouse,
retail floor, and elsewhere. As you evaluate
peripherals, use the software vendor to learn more about
how you can use them to improve your business. User site
visits provide an opportunity to observe new
technologies actually in use by similar companies to
yours.
Software Vendor
The software vendor is the company that develops
software product and functionality and will continue to
develop it in the future. Because the technology
business environment is constantly changing, evaluation
of the software vendor is as crucial as the evaluation
of the functionality. You should not merely look at the
vendor’s current strength as a company, you should look
at how the vendor plans to develop its software going
forward. Because you will pay annual
maintenance for several
years, you want the vendor to create new functionality
and technology that will continue to be useful to your
company.
Vendor Viability
Over the past decade there have been a myriad of mergers
and acquisitions that have altered the landscape of the
ERP software market. Although this has led to some
consolidation in the market, there are still many
vendors and software products available. The difficulty
comes in guessing what will happen within the next few
years to the vendor you are evaluating. Acquisitions are
frequent, and it is not just small vendors that are
being gobbled up. Even large vendors such as PeopleSoft,
Symix, and SSA, are being acquired at a rapid pace. In
fact, it is impossible to predict if a vendor or
software product will be acquired. Because an
acquisition is always possible, it is important to
understand what may happen to your software product upon
acquisition.
Software
vendors use four main strategies when they acquire other
software vendors or products:
-
To add additional functionality to its own product
-
To eliminate a competitor
-
To gain entry to a vertical market
-
To obtain its user base
Each strategy
presents a danger that the software product you purchase
could eventually be discontinued. Therefore, it is very
important to select a strong software vendor with a
significant install base to serve as a buffer. The more
installs a particular product has when acquired, the
more interested the acquiring company will be in
maintaining the product over an extended period of time
in order to continue to collect maintenance revenue.
Occasionally the acquiring company will maintain the
software without actively developing or selling it.
Eventually the maintenance revenues will diminish to the
point that the vendor will discontinue support and
customers will be asked to migrate to another software
product.
The vendor’s
strength can be a good indication of its ability to
remain independent. A good way to evaluate the strength
of a vendor is to look at its size. What is its
financial situation? How many employees does it have?
How many locations? How many installations has it
completed? Does the vendor seem to have momentum in the
marketplace or does it seem to be losing market share?
Make sure you
do not completely disregard small, up and coming vendors
that have few employees but have a lot of momentum. New
companies bring fresh ideas to the market and can bring
new capabilities that can give them a strategic
advantage over their larger competitors. Indeed, all ERP
software companies were small at one time. If there is a
compelling reason to select and implement software from
a small vendor, by all means proceed, especially if the
vendor offers industry-specific functionality.
Strategic
Direction
You should evaluate the vendor’s strategic direction to
make sure it supports your company’s strategic
direction. What are the vendor’s plans for taking the
software into the future? Is it in a direction that will
help your company? Although you can get some of that
information from marketing collateral, press releases,
and salespeople, we find that it is best to speak
directly with the VP of development and the technology
developers at the vendor’s headquarters who actually
develop new functionality and technology.
Vendor Partnership and Organizational Compatibility
Do not
overlook the vendor’s compatibility with your
organization. You are in the process of forming a
strategic partnership that will last for many years. As
the vendor continues to enhance its software, and as
your company’s business needs evolve, this should be a
synergistic relationship that you both feel comfortable
with. This cannot be an objective evaluation of the
vendor; it is a subjective evaluation of your comfort
level between two companies that is impossible to
quantify. Do you feel you can work with this vendor? Is
it easy to communicate your needs to them? Does its
culture match the culture you have worked to develop in
your company? Will it be a good partner that will help
you achieve your goals as a company?
To sum up, software vendor evaluation is a very
important aspect of your selection project. Always keep
in mind that you are forming a strategic partnership
with this vendor. We have seen companies walk away from
a software vendor even though the software product could
handle all their functional requirements simply because
of compatibility issues. You will be paying an annual
maintenance fee for the software which allows the vendor
to fund new enhancements and technology. Will the vendor
be adding new functionality that is of interest to you?
Will you be able to take advantage of strategic
capabilities not only in the initial implementation but
in years two through five? Will the vendor be a
long-term partner for you?
Implementation
Vendor
The most overlooked, yet often the most important,
aspect of the ERP software selection process is
selection of the implementation partner. The right
implementation partner can bring experience, industry
knowledge, best practices, and technical capabilities to
the table that will have a big impact on the success of
your project. It is important to understand that you
have implementation options available to you. You should
exercise your right to select an implementation partner
on your own terms.
In order to better understand your implementation
options and how to go about selecting an implementer, we
need to first discuss
the software sales models that vendors employ to
distribute their software. Software vendors use two
sales models, direct sale from the software vendor, and
sale through a value-added reseller (VAR). Some software
vendors only sell direct to the customer, some vendors
sell exclusively through VARs, while others use both
sales models depending on the situation. It is important
that you understand the selling method of the vendor you
are evaluating in order to do a proper evaluation of the
software and implementation partner for each individual
vendor.
Direct
Sales Model
If the software vendor sells directly to the customer,
you need to deal directly with its sales force. This is
usually the case with
high-end ERP vendors, SaaS vendors, and small
industry-specific vendors. Small industry-specific
vendors will expect you to use
their in-house implementation teams. High-end vendors
require you to purchase the software directly and
usually expect you to
use their implementation teams, but a few allow
third-party implementers which can give you access to
better rates, expertise, availability, and industry
knowledge. SaaS vendors might expect you to use your own
staff to implement, but an increasing number
of SaaS VARs are forming.
Value-added Reseller Sales Model
Many major mid-market software vendors such as Microsoft
and Sage sell exclusively through a network of VARs. If
you are considering a vendor that uses this model, you
actually need to select the VAR before you begin the
software evaluation. The VAR
will be your contact during your evaluation, will
conduct product demonstrations, and will supply the
resources for the implementation. In the future the VAR
will be your point of contact for maintenance, upgrades,
training, and support. The VAR supports but does not
warranty the software it sells.
Evaluating a VAR
Evaluating a VAR requires the same level of effort as
vendor selection with concentration on the people who
will be performing the work. What else should you
consider when evaluating a VAR?
Company
size and background.
How many employees does the VAR have? Does it have
sufficient resources to implement for you and to provide
product support after go-live? Keep in mind that
sometimes a small “boutique” VAR may service you better
than a large national chain. Concentrate on the
qualifications and experience of the staff.
Product
focus.
Find out how focused the VAR is on the product that you
are considering. What other applications do they
implement? Does the implementation team have real-world
experience in your industry? It is important to
understand how many products they implement, how many
people are supporting each product, how many installs
they have with each product, and their plans for each
product. This allows you to see where their focus and
capabilities are.
Location.
Is this a local VAR or is it a national chain? If you
have a need for a national or international
implementation, do they have the resources to support
the size of your project? On the other hand, a local
company that has a vested interest in your region might
suit your needs better.
Industry
focus.
Are there particular industries that the VAR seems to
focus on or has a lot of experience with? If possible,
you should find a VAR that has experience working with
similar companies in your industry or similar
industries. In some cases you may need to look at VARs
located in other states to find the particular
experience you are looking for.
Technical
resources.
How does the VAR mesh with your internal IT team? If you
do not have an internal IT team, how will the VAR
support your technical requirements? Do they have enough
resources to properly assist you? Are they conversant on
the technology that you are most interested in? Can the
VAR integrate the system to other systems you are using
such as a separate billing system for a unique business
requirement?
Selecting the
right VAR or implementation partner is crucial to the
success of your implementation. As you evaluate your
implementation options your main focus should be the
actual implementation team members. You need to consider
whether you feel comfortable working with the project
team the vendor recommends. The actual team members are
the ones you will be working with on the implementation.
If you do not feel comfortable with them, ask the vendor
for another team. You need to get the right team that
understands both the software and your industry. You are
forming a long-term partnership and you need to be a
good fit for each other.
Maintenance and
Support
The main thing to keep in mind with regard to
maintenance and support is that you are not implementing
a static system. You should regard your ERP software as
a key component of your organization just as you would a
machine on the shop floor that requires care,
maintenance, and upgrading. As the software vendor
improves its technology and functionality, you should be
able to take advantage of those enhancements. You will
then be able to maximize your investment and use the
system to gain a strategic advantage.
Maintenance
After implementation you will pay an annual maintenance
fee, or monthly subscription fee in a SaaS environment.
This fee is used
to fund continuing development of new functionality
through upgrades. Your maintenance fee entitles you to
these upgrades, which allows you to continually improve
the functionality and technology of your software
without having to replace your system every few years.
Thus an ERP system actually becomes a continually
evolving and improving tool for your business.
Companies sometimes decide to stop paying their annual
maintenance fee for any number of reasons. They may feel
they do not benefit or get support value from the
maintenance fee, or they may have customized the
software so much that it took them off
the upgrade path. The result is that their ERP software
basically remains in a static state. This can work fine
for a few years, but as technology and functionality
becomes outdated the company will get farther and
farther behind the technology curve. They are
then forced into selection of a new system.
Support
Support is a very important consideration, particularly
during the first year after go-live. Vendors that sell
direct will also provide support. If you buy through a
VAR you will usually receive two levels of support—from
the software vendor and from the VAR. The vendor
typically provides general support, while the VAR who is
familiar with the nuances of your specific installation
provides more detailed support. While some level of
support is included in the maintenance fees, you can buy
additional support based on a fixed number of hours, or
number of incidents.
Among the many
types of support programs are:
FAQs and
system manuals.
This is the most basic level of support and is sometimes
included with maintenance. You do not get personalized
service, but if you are adept at researching problems
and figuring things out on your own, it is a good way to
get answers to common issues. In cases where
configurations and customizations are planned, your
implementer should provide specific documentation and
support manuals for that work.
Online
support.
Online support
comes in various forms including email, chat sessions,
and message boards. Response time may or may not be
instantaneous, so you will probably need to be patient
with this type of support.
Phone
support.
Depending on the level of support there can be either
instant support, or a guaranteed call back timeframe.
Off hours support is available with some large vendors.
Small vendors typically have support personnel on call
who will call back if there is a major issue during off
hours. You should find out what the phone support hours
are, if there is a callback guarantee, and what the
coverage is both geographically and during off hours.
You need to be aware of the support coverage of the VAR
or implementation vendor. In some cases you will need
worldwide 24/7 support. For small companies, local
support can be more important than round-the-clock
availability. You need to match what the vendor or VAR
can support with your requirements.
Onsite
support.
Software vendors often have the ability to remotely log
into your system to fix issues and problems, saving a
significant amount of time and money for both you and
the vendor. However, it is necessary at times to have
the vendor come onsite to deal with major issues. This
is a common method for support during and immediately
after the initial implementation, but, depending on the
complexity of the problem, it is not used as often after
that because of the cost.
All these
support methods have different cost levels. It can be
difficult at first to know what the right level for your
company will be. Most of the support cost is typically
in first year. You may want to have a comprehensive plan
for the first year, with subsequent years scaled back.
Training
One of the biggest problems with software systems has
nothing to do with the actual capabilities or technology
of the software. It has to do with user training.
Typically, post-implementation training is very
comprehensive. However, unless ongoing training is
offered, bad habits can develop which break down user
knowledge and understanding of the software’s
capabilities and functionality. New hires might be
trained by users who do not use the system correctly,
passing on the bad habits they have developed. This
causes frustration with the system that induces users to
devise workarounds using resources outside the system
such as spreadsheets. After a few years of working
outside the system, users become completely dissatisfied
and demand change. Even though the system may be
completely adequate, users think the system does not do
what they need it to. A new software selection might be
warranted because users will not use the current system.
Because they want to reduce costs, companies sometimes
curtail training after initial implementation. In
actuality, setting up a proper schedule of continuous
training saves a company more in the long run than any
short term cost savings. Ongoing training helps users
gain full, effective, proper use of the system for many
years to come and helps preserve your initial
investment.
Periodic
Review
About every four to five years, you should review your
ERP software to see how it is supporting your business.
Businesses change and evolve over time, so you may no
longer have the same functional requirements you had a
number of years ago when you purchased your software
system. A periodic review enables you to identify
requirements for adjusting the system to fit your
current needs, or to provide solid reasons for making a
change.
The three main
areas you should review are:
-
Functionality.
Does the
system still have the functionally you need to run your
business? Are there new requirements
in your industry that require enhancements or add-on
software products?
-
Technology.
Are you keeping up with the rest of the world
technologically? Are you maintaining your
competitive advantage?
-
Integration.
Are integrations with ancillary systems working
properly? Is new technology or functionality now
available that will allow you to eliminate some of your
third-party applications?
If you
periodically review your systems you will be able to
keep the system focused on being a usable tool for your
company
and industry.
Total Cost of
Ownership
In general, companies spend more money on software than
they should because they buy more software than they
need. By focusing on what you need and understanding the
total cost of ownership of your software options, you
make sure you pay the right amount for your software.
The challenge with evaluating the total cost of
ownership of a software solution is that not all costs
can be known before you begin implementation. Also,
there is usually some discounting of the software
license during the sales process that may obscure the
total cost. The key is to look at cost from a long term
perspective—usually five years—to help you get past the
initial “sweet deal” discounting process and focus on
what the real costs will be.
You should
consider three main cost areas: software license,
implementation, and maintenance and support.
Software
License
There are as many methods of software license pricing as
there are software vendors. Therefore you need to
understand the key price drivers for the software vendor
you are considering. This typically comes from a
discussion with the salesperson before you request a
quote. You can then look internally at your
organization’s needs and requirements and provide the
vendor with enough information to provide a price quote.
The software license cost is generally calculated based
on the modules, or suites of functionality you purchase
and the number of users on the system. Make sure you
understand the vendor’s definition of a user so you can
accurately estimate the number of users you will have.
In addition to user counts, some vendors base cost on
factors such as the modules purchased, number of
locations, number of servers, transaction volumes, and
number of companies or subsidiaries. Some vendors offer
enterprise pricing, which allows unlimited users and
gives the ability to add any other modules within a set
of modules.
Make sure you buy only the functionality and modules you
need. Many companies buy modules and functionality that
they then never implement, paying maintenance on
software they never use. If you focus your analysis and
purchase only the functionality you need, you should be
able to save some money. If you think you might need a
particular module in the future, you can negotiate the
future purchase price of additional modules before you
close the deal. Keep in mind that you are buying your
system for the long term and you need to be able to grow
and add functionality and users as necessary.
Don’t forget to include third-party add-on modules or
ISV products in your pricing estimate. This is an
additional cost that you will want to include in your
analysis of the total cost.
The software license has the most flexibility with
regard to discounts. Vendors have been known to offer
significant discounts depending on the situation. This
is particularly true at the end of a quarter or fiscal
year. The key is to use your negotiating power before
you sign a contract. The software vendor is just as
interested as you are in signing the deal and moving
forward. Discounting can move the agreement along.
Implementation Services
As you begin your conversations with vendors and VARs
you will discuss the cost of implementation services as
a ratio. This is typically expressed as the ratio of
implementation cost to software license cost. Every
implementation is unique, so actual costs vary widely.
Complex requirements with many integrations drive the
implementation costs higher, but a typical mid-market
average implementation ratio will be in the 1:1 range.
In other words, for every dollar you spend on software
expect to spend a dollar on implementation costs. For
more complex implementations, the ratio could be in the
2:1 or 3:1 range.
Implementation
services commonly include installation, setup, custom
configuration, data conversion, integrations, initial
training,
and initial troubleshooting. In short, everything you
need to get the software up and running as a useful tool
for your business.
Some vendors and VARs will provide a fixed fee proposal,
but the scope of the project must usually be very
closely defined and anything outside the scope will
incur extra costs.
Every VAR and
implementation vendor sets its own billing rates. Higher
rates do not always translate into better and more
qualified service. Look for the right mix of price and
experience, keeping in mind that you have multiple
implementation options. Implementation services are so
critical to the success of the project that this needs
to be a strong consideration in the software evaluation
process.
Maintenance and Support Costs
You can expect to pay between 18% and 25% of the
software license cost on an annual basis for maintenance
and support. Maintenance cost includes upgrades, patches
and some level of support depending on the support plan
you select. The net effect
is that you actually end up paying for the software over
again every five years. Remember, you are not buying a
static product, but
an ERP solution that is constantly evolving and
improving.
Infrastructure Cost
Infrastructure comprises the hardware such as servers
and wiring necessary to operate the new system. This
cost is sometimes included in the implementation cost.
If your company has already made a significant
investment in infrastructure that will have a big
influence on the software you will select. In cases
where functionality drives the software decision
process, infrastructure change needs to be considered as
a possible expense. Although it is an important
consideration, the relative cost of hardware and
infrastructure has come down significantly over the
years as compared with the software license and
implementation costs. Companies typically let software
functionality drive their decision and adjust the
hardware to optimize the selected software.
SaaS
In a SaaS environment you avoid the large up-front
software license fee and the annual maintenance fee.
SaaS vendors roll those
two costs into their fixed monthly subscription fee.
Infrastructure cost is typically lower in a SaaS
environment because there is no hardware to purchase and
maintain, all you need is an up-to-date browser and good
Internet bandwidth. Depending on the complexity of your
situation, implementation costs can be very comparable
to an onsite implementation if you have significant
configurations, customizations or integrations. In order
to properly analyze the cost of SaaS you need to add
together all the monthly fees over a five-year period
and compare that side-by-side with the software license
and maintenance costs over the same five-year period of
an onsite implementation.
Internal
Cost
Internal cost is extremely difficult to estimate and
quantify. It is the cost of productivity that will be
lost during the implementation, possible disruption of
business as you implement, and other costs that are not
actually paid with a cash outlay.
The two components of internal cost are direct and
indirect. Direct cost is the cost of your employees
assigned to the project team and any temporary staff
necessary to complete day-to-day work on behalf of
project team members. It also includes the time for
training on the new system.
Indirect cost includes the downtime that occurs due to
the implementation, duplication of data entry, and other
work that must be done to accommodate the
implementation. This is difficult to quantify as users
become involved with the new system over time and
gradually learn how to effectively use the software. To
quantify the indirect cost of an implementation, you
will have to make a number of assumptions because this
cost has no specific guideline.
Although it raises your internal cost, we have found
that the more internal resources you can commit to the
project, the shorter the implementation time will be and
the likelihood of a successful implementation increases.
Companies that experience trouble with implementation
often have not dedicated adequate resources to it. They
end up paying more for the system in the long run.
Return on
Investment
Some companies are required to perform an ROI analysis
to justify selection and implementation of a new ERP
system. ROI analyses depend on assumptions of intangible
benefits.
ROI is typically determined by estimating the cost
outlay and comparing that to the long run cost savings
from assumptions of efficiency and time savings that
result from use of the new system. In order to calculate
these savings, you either need to reduce headcount or
cut hours for employees that are using the new system.
In reality, people are typically not let go, and the
hours that had been spent in data entry into the old
system shift to other new, more productive activities.
Ultimately, if you have an ROI requirement, you will
need to make good estimates for the efficiency and hours
of savings.Although there
are many different methods of ROI analysis including
payback period and economic value-added, the basic
components include:
-
Software license cost estimate
-
Implementation cost estimate
-
Software maintenance cost estimate
-
Cost of capital
-
Estimated hours of savings
-
Time period
Because ROI is
based on estimates, the validity of the ROI analysis is
dependent on the accuracy of your estimates. It is
important to understand that ERP software is typically
not purchased based on an ROI analysis. Rather, it is
used to increase efficiencies and make sure that you are
able to take advantage of both the functional and
technical capabilities of the system.
Conclusion
When we share or teach the principles presented in this
article, we represent them as puzzle pieces which must
be fitted together to complete a whole picture. If one
of the pieces is missing, or if a piece is not connected
to the others in the right manner, the resulting picture
is incomplete. So it is when selecting software. None of
the decision drivers can stand alone nor can anyone
decision driver identify an accurate solution unless the
other decision drivers are considered as part of the
whole. It is not that the solution becomes more perfect,
rather it becomes more obvious that you have made the
right decision.
Software selection is every bit a process of elimination
as it is of inclusion. Knowing what was not selected and
why has tremendous value in post-decision reviews. We
encourage clients to keep a list of the products that
were eliminated along with the reasons for exclusion.
Know from the outset that the final solution is not
going to be perfect; in fact, you will trade away some
attractive features in order
to preserve the core gains you must achieve in the new
system. It is easy to become bogged down in details or
to get caught up
in “analysis paralysis,” so identify the key issues
first to eliminate most of the packages and then climb
into the details as the process continues. Knowing what
the core gains need to be and keeping them in focus
throughout the process is critical to keeping the team
pointed in the right direction. Our experience is that
if you consider all six decision drivers, you will come
up with a solution that will propel your company in the
direction you want it to go.
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