By Mike Hart
An ERP system is a massive investment, not only in software, but in implementation services. Implementation costs typically exceed the software cost and can be ruinous to a small business. Why is ERP implementation so costly? Let’s examine the various service costs that are likely to be incurred.
Consulting Costs
The ERP software industry relies on services for much of its revenue and profits. As a consequence, software companies avoid offering self-implementation tools that would threaten this revenue stream. Implementation services are provided by in-house consultants, resellers, or contractors. Consulting is either billed by the hour or by a flat fee, neither of which is cheap. While you may be able to finagle a discount on the software, you almost always pay the full rate for services.
Travel Costs
It is highly unlikely that your consultant lives in a nearby neighborhood. Most typically the consultant travels from a remote location and will bill you directly or indirectly for airfare, hotel, car rental, meals, etc. This necessitates longer visits and full day engagements to justify the cost, even though shorter, more frequent engagements are more productive.
Installation Costs
An ERP system involves software and hardware and is rarely a “do it yourself” installation. You may need to purchase new equipment to conform to the software’s requirements. In most cases a technician is required to set up the network and install the software. The technician may be local or may travel to your site and bill you for travel costs.
Training Seminar Costs
Many ERP software companies offer training seminars because they are lucrative and highly popular with employees, who get to take time off work and stay a few nights in what is often a tourist destination. Training seminars are enormously expensive because of travel costs and registration fees. They are also highly ineffective for learning because people cannot absorb information presented in lengthy, marathon sessions.
Data Import Costs
Data import is a lucrative revenue source for consultants, who will gladly spend hours writing data import routines, even for tables with only a few records that could be entered manually in a fraction of the time. At a minimum you will need to import items, bills of material, suppliers, customers, selling prices, and initial stock quantities and costs.
Forms Customization Costs
Consultants will help you customize all your forms, including quotes, acknowledgements, packing lists, shipping labels, invoices, purchase orders, item labels, checks, etc.
GL Setup and Conversion Costs
ERP systems have complex general ledger structures and will typically require a complete revision of your chart of accounts and data conversion. This process requires many hours of consultant supervision and involvement.
Routings Setup Costs
Many small businesses have never implemented work centers and routings, which are essential for labor and overhead costing, process documentation, and shop control. If the consultant gets involved with routings setup, he or she does not know your products and processes and will consume a great number of hours on the learning curve before any tangible results are provided.
MRP Workaround Costs
Most ERP systems offer an optional forecast-based MRP module for job and purchase order planning. Small businesses either don’t purchase the module or they do so and then find it too complex and cumbersome to use. The consultant then steps in to offer MRP workarounds with custom programming that typically simulates the company’s traditional planning methods. MRP workarounds are open-ended and can take on a life of their own and are rarely anticipated in initial cost estimates.
Custom Programming Costs
Consultants promote custom programming not just for MRP workarounds, but for virtually anything, whether truly needed or not, because custom programming is a major source of consulting income and fosters an ongoing dependency relationship that locks in future services.
Startup Day Costs
An ERP system must be started on a specific day when inventory, open sales orders, jobs, and purchase orders, and beginning account balances are transferred to the ERP system and you cease operating in the old system. A great deal of consulting will be involved and may include custom programming to transfer open orders and jobs.
Ongoing Costs
Consulting costs don’t end with system startup day. The ERP implementation experience typically results in a dependency relationship, especially when custom programming is involved. Ongoing consulting is often a permanent addition to fixed overhead costs.
Is there a less-costly alternative?
In my next post, I will outline an alternative approach to traditional ERP that is much more suited for small business in terms of cost and efficiency.
Mike Hart is the co-founder of DBA Software Inc., a leading provider of manufacturing software for small business.
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