Picture a small textile workshop owner. A friend in accounting recommends an ERP (enterprise resource planning) system that handles inventory, invoicing, and bookkeeping in one place. The price list looks manageable, so he signs the contract. Six months later, the total amount spent on that system is nearly three times the original license fee. Where did the difference come from?
Buying an ERP system is a lot like buying a car. The sticker price gets you in the door, but fuel, insurance, servicing, and parking add up fast. In the software world, the full picture is called the ‘total cost of ownership.’ This figure shows what a system actually costs you over time. The license fee is just one line in that table.
The first major item is consulting. ERP systems are not the kind of software you install from a box and start using the next morning. The system needs to be configured to match how your company actually works. Consultants who do this work charge by the day, and even for a small company the process can take weeks. Choosing the cheapest consultant sounds sensible, but an inexperienced one who drags the project out will cost you more in the end. Asking for references and choosing someone who has worked in your industry before can save real money at this stage.
The second major item is training. The system is installed, but how will your staff use it? The bookkeeper needs to learn the invoicing module, the warehouse supervisor needs to handle stock entries, and the owner needs to read reports. Each requires separate training. Some companies try to cut this cost by training only one person and telling that person to teach the rest. This is the wrong kind of saving. If that one person leaves, the company no longer knows how to run the system properly. Cutting training costs looks like a saving in the short run but tends to be far more expensive later on.
The third item is the annual maintenance and support fee. Software vendors typically charge between fifteen and twenty percent of the license fee each year for maintenance. In return, you receive program updates and technical support. Some companies choose not to renew this contract after the first year. Things run fine until the day the system crashes or a new regulation requires a change. Without a support contract, finding a solution becomes both difficult and expensive. Cancelling the maintenance agreement is a decision worth thinking through very carefully.
There is also a cost that never appears on any invoice: internal resource time. While the system is being set up, your own staff are spending hours on the project. The bookkeeper is migrating old records, the warehouse supervisor is entering product lists, and the manager is sitting in meetings. Those hours have a value, even if no one writes them on a bill. On top of that, regular work slows down during this period. A customer order ships late, a payment deadline is missed. This is the ‘opportunity cost’: the price of the work that could not be done because of the work that had to be done. Building a realistic installation schedule keeps this cost as low as possible.
Before committing to any ERP purchase, write down the answers to four questions: How much have I budgeted for consulting? How many people need training and what will that cost? What is the annual maintenance fee? How many weeks will my own staff be tied up during the installation? Add those four figures to the license fee. The total you get is what the system will actually cost you. Compare that number against your available budget. If the budget falls short, starting with a smaller system and expanding it in later years is a far healthier approach than buying a large system on half a budget. A half-finished implementation, like a half-cooked meal, satisfies no one and carries real risks.
This article was originally written in Turkish by Gökhan MERCANOĞLU on February 10, 2003 and has been automatically translated into English and other languages using machine translation.