Total Cost of Ownership in ERP

What is it? What are its components? How is it calculated?

"Total Cost of Ownership in ERP? What's that?"

The most important thing we tell our prospective customers when purchasing ERP or any enterprise business software is that they should look at the total cost of ownership rather than the initial cost of ownership offered to them when making a purchase.

As Workcube, this is one of the most important advantages we offer to our customers over competitor solutions, whether they are domestic or foreign.

The question at the beginning of this article is one of the most frequently asked questions. Here we have devoted this article specifically to the components of the total cost of ownership and how businesses should calculate the minimum 5 year cost of ownership when purchasing ERP or any enterprise business software.

What is the Total Cost of Ownership?

The concept of Total Cost of Ownership TCO was first introduced by Gartner in the mid-80s. In a basic sense, TCO means that a business has to have a license to use an ERP solution, provide the necessary infrastructure to host that solution, adapt it to its own business needs, to use it actively and seamlessly and with high performance throughout the business. And it means calculating all the fixed and variable product, service, and labor costs that it needs in order to continue using the ERP software in accordance with its changing needs and structures for at least 5 years.

It may seem a little complicated, but it's actually not that complicated.

It is best to first understand the following components and inquire about the advantages & disadvantages or costs you will encounter in each component if you purchase the product of the software suppliers you have contacted, and make your cost comparisons by calculating each item in your cost calculations.

What Are the Components of Total Cost of Ownership in Enterprise Business Software Purchases?

1- Software (As Is) License Cost

The licensing of all software is “as is”, that is, only for the currently available functions of the software. It does not cover the work and services required to make it suitable for your business. There are basically two generally accepted models in today's typical ERP or enterprise business software licensing. One of them is the licensing model, which is often called on-premises, and the other is the SaaS (Software as a Service) licensing model, in which software identified with Cloud-based systems is used as a service.

2- Infrastructure Cost

If you have the software with On-Premises licensing that means you will host the software solution on your own servers; the cost of the server and necessary infrastructure software (database, operating system, application server, etc.) on which this software will run are also the costs that must be covered by you.

Each software supplier classifies these types of software and hardware requirements that it supports in its infrastructure according to certain scales and notifies you from the sales stage.

No Infrastructure Cost in Cloud Licensing!

Under this heading, we should definitely state that all these costs are included in the monthly fees you pay in Cloud ERP licensing. The software supplier offers you both the software and the infrastructure service necessary for its full performance. When companies evaluate Cloud ERP Licensing costs, they often ignore this most important item and tend to misunderstand or find it expensive. However, Cloud ERP licensing is a full package model that will save you from both cost and server management and similar problems.

3- Project Cost (Implementation and Customization)

We all know that ERP software is not plug and play software. In order for an ERP solution to be used with live data in your business, some additional work needs to be done. The effort spent on the services you will receive for the implementation and customization of the solution you will purchase according to the needs of your company's processes and operations is the main determining factor in the project cost. For this reason, project costs are usually offered to you as Man/day X Man/Day fee in ERP offers.

According to statistics, 5 unit project costs (total of project management, implementation and customization services) for 1 unit license fee is the general average in ERP projects around the world. 

When Comparing Project Costs,

• To what extent does the software solution's "as is" meet your needs? (For this, you can make a scoring and percentage calculation by writing your needs item by item and giving 1 point to the solution that presents the function as is in return.)
• Whether it has parametric structure and built-in customization tools that it offers (and can be used as self-service by you) to adapt to your processes and way of doing business or not.
• Flexibility and speed in code development are the issues that you should pay the most attention to.

For example, editing a complex screen such as a sales order according to your needs may take 2 hours in one solution and 2 days in another solution. This increases your project costs.  

4- Maintenance Cost

You have completed your project. You started to use the ERP you purchased with live data. Now, a concept called maintenance cost enters your life. The maintenance cost heading covers two concepts. One is Support Service and the other is License Update.

Support Fee: You will always need a support team that will take an active role in resolving potential usage problems and questions so that you can continue to use a system that contains your company's vital data without any problems. The support service is mostly the first aid service provided to you by the solution provider that brought your project to life. This service includes services such as usage assistance, detection and first-hand elimination of usage-based errors, updating your information about new versions of the solution you use, and eliminating problems and information needs that may occur during the transition to the new version.

License Update: Software development is a never ending process. For this reason, software brands constantly release new versions and releases. These versions may include additional functions not included in the current version. At the same time, it may include legal and regulatory updates, new technological developments of the software or studies on adaptation to new versions of different software/hardware solutions (eg database, application server, operating system, browser, etc.) in its infrastructure.

5- Cost of Scalability

When it comes to ERP software, you need to ask your vendor these 2 simple questions to assess scalability:

Will the solution I purchased be able to adapt to the changes that may occur in my business in the future (such as increase in the number of users, increase in data load, additional function demands, process changes)? And what will it cost me?

You should be able to calculate the cost of scaling around the 3 main components.

Functionality: Will the solution you purchased be able to provide you with additional functions or modules that you will need in the future? How much money will you have to spend on these additional functions or modules in the future?

Number of Users: Another important issue in software scaling is the increase of the number of users. Of course, increasing the number of users is an essential feature for almost any ERP solution. What sets the solutions apart here is the additional cost and workload you have to bear for new users.

Usage rate/data load: When your software usage rate increases and the data you store increases rapidly, how will your solution respond to this? The architecture of the software you use should be designed in such a way that you can continue on your way without sacrificing performance by providing the necessary infrastructure investments as your business, transaction, and data load grows. 

6- Training Cost

ERP software is complex software that requires the correct use of multiple users simultaneously. Key users, system administrators, and end users in your company will need training.

Typically, ERP vendors meet their customers' additional training needs for a standard hourly/daily rate, either online or offline, on demand. There will also be times when a consultant is required when your organization's specific content or advanced specialist needs arise. In this respect, it is recommended that you examine the help and training resources that the ERP solution offers for the use of standard functions. In any case, when reviewing ERP systems for procurement, you need to factor these additional costs into your analysis.

7- Workforce Cost

During the project, you will need to create a project team within your company to make the solution suitable for your company. And in this team, your employees will take part in many levels. In long-running projects, the time spent by your employees and managers who are on your payroll and who put effort into the project, and the losses due to the disruption of other work they are responsible for while devoting time to this project is a serious and often overlooked cost.

In addition, your company needs employees with new technical expertise not only during the project but also after going live.

Factors such as the infrastructure requirement, ease of management, learnability and usability of the system you will purchase will determine the depth of these specializations and the number of technical team you will have. While it is sufficient for 4 people to work in the IT department to maintain and manage a solution smoothly and uninterruptedly, this number may increase to 15 in another solution. For this reason, in order to determine the workforce cost, which is one of the most hidden costs of ERP projects, you should definitely ask the following questions to yourself and your supplier.

• If you are using an on-premises solution, what competencies and how many people will you need for activities such as the management of the infrastructure (server, operating system, database, etc.) required by the solution, keeping it accessible 24/7, ensuring its security and maintenance, and backing up?
• How many members for a system management team are needed to manage your corporate business system?
• How easy is it to learn and implement the system management tools that the system offers?
• Are you going to customize the solution you are going to buy in-house? How many members for a software development team will you need if you are going to customize it?

Result

When evaluating the enterprise software alternatives in the shortlist you have prepared, be sure to ask them to issue a budget that shows you the 5-year Total Cost of Ownership. In particular, you will see that elements such as cloud licensing and unlimited user options make huge differences in both cost and return on investment (ROI) when comparing software.

You can find more detailed information about Workcube Solutions at the links below.

Workcube Solutions