ERP implementation-the hidden cost

Updated: Feb 26 2008, 08:08am hrs
ERP software packages promise great benefits. But what are the costs involved Exactly how much will one have to pay to get them In most cases, the ERP implementation cost will exceed the budget Why is this Even a well planned and thought-out budget may be exceeded. In this section we will examine the areas that most managers fail to account for in their budgets. Or in other words, we will discuss the hidden costs of the ERP implementation.

Few companies buy enterprise resource planning, or ERP software just to save money. The objective is the integration of company-wide information. A single, enterprise-wide computer system should be cheaper and easier to maintain than a hodgepodge of antiquated COBOL applications from a dozen different vendors. The move to ERP is a project of breathtaking scope and the price tags on the front-end are enough to make the most stoic manager a little twitchy. In addition to budgeting for software costs, financial executives should plan for consulting, process re-work, integration testing and a host of other expenses before the benefits of ERP start to appear.

Although different companies find different hurdles and traps in the budgeting process, those who have implemented ERP packages agree that some costs are more commonly overlooked or underestimated than others. Armed with insights from across the business, ERP implementation veterans agree that either one or all of the following eight areas are most likely to result in budget overruns:

* Training

* Customisation

* Integration and testing

* Data conversion

* Data analysis

* Consultants

* Brain drain (employee turnover)

* Continuing maintenance

Training

Training is the unanimous choice of experienced ERP implementers as the most elusive budget item. It is not so much that this cost is completely overlooked, as it is consistently underestimated. Training expenses are high because workers almost invariably have to learn a new set of processes, not just a new software interface. Take for instance, a receiving clerk who accepts shipments of raw materials. With an ERP package like SAP, that clerk now becomes an accountant because he is keying new inventory directly into a live system. Mistakes have an immediate impact on the books. And once every receiving clerk has access to the system, the plants accounting department can no longer simply look at their data in batches; now they need to be able to pin-point the origin of each data entry to verify its accuracy. ERP is not so much about technology implementation; it is a lot of work to setup the software.

Customisation

Customisation of the ERP system happens when it cannot support one or more of your business processes and you decide to make it do what you want. You will have to do it all over again in the new version. The big chunk of costs for professional services is customisation. The cost of customisation can easily out-run the cost of packaged ERP software, but it is the customisation of ERP software that makes an ERP a success or a failure.

Integration and testing

ERP systems will not demonstrate their full potential unless they are properly integrated with other enterprise software applications. There are three main areas that need integration:

* The integration of the various functional ERP modules

* The integration of ERP with other eBusiness software applications

* The integration of ERP with legacy systems

Most ERP packages are very complex systems. Interfacing with those systems is not an easy task. Testing the links between ERP packages and other corporate software links that have to be built on a case-by-case basis is another essential cost that is easily missed. Most companies will have some system that will not fit into the ERP packages functionality and which will have to be interfaced with the ERP package. In most cases such integration can be costly.

Data conversion

It costs money to move corporate information, including customer and supplier records, product design data and the like, from old systems to a new ERP system. Most data in most legacy systems is rubbish. But most companies seem to deny their data is dirty until they a actually have to move it to the new client/server setups that popular ERP packages require. As a result, those companies are more likely to underestimate the cost of the move.

Data analysis

There is a misconception that the ERP vendors perpetuate that you can do all the analysis you will want within their product. But often, the data from the ERP system must be combined with data from external systems for analysis purposes. Users with heavy analysis needs should include the most of a data warehouse in the ERP budget and should do quite a bit of work to make it run smoothly.

ERP consultants

The extravagant cost of ERP consultants is a well-known fact. Like training expenses, this cost is hard to circumvent. Choosing a lesser-known ERP package to avoid premium priced consultants wont necessarily help either. When users fail to plan for disengagement from the existing system, consulting fees will overshoot the budget. To avoid this, companies should identify objectives for which its consulting partners must aim when training internal staff. It is a good practice to include performance metrics and time schedules for the consultants. For example, a specific number of the companys staff should be trained to a certain specified level.

Brain drain (employee turnover)

It is accepted wisdom that ERP success depends on staffing the project with the best and brightest from the business. The software is too complex and the business changes too dramatic to trust the project to just anyone. The bad news is that a company must be prepared to replace many of these people when the project is over. Though the ERP market is not as hot as it once was, consulting firms and other companies that have lost their best people will be hounding yours with higher salaries and greater bonus offers than you can afford or that your HR policies permit.

Huddle with HR early on to develop a retention bonus programme and to create new salary strata for ERP veterans. If you let them go, you will wind up hiring themor someone like themback as consultants for twice what you paid them in salaries.

Continuing maintenance

Most companies intend to treat their ERP implementations as they would any other software project. Once the software is installed, they figure that the team will be scuttled and everyone will go back to his or her day job. But after ERP, you cannot go home again. You are too valuable. Because they have worked intimately with ERP, they know more about the sales process than the salespeople do and more about the manufacturing process than the manufacturing people do. Companies cannot afford to send their project people back into the business because there is so much to do after the ERP software is installed. Just writing reports to pull information out of the new ERP system will keep the project team busy for at least a year.

Reprinted with permission from

Tata McGraw-Hill

Book: Enterprise Resource Planning

Author: Alexis Leon

Price: Rs 295

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