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Part 1: The Four Key Factors That Effect ERP Costs

Ever wonder why some ERP software costs $300 while some implementations can run into the millions of dollars? The answer is not as simple as it is with other products; more features may not necessarily mean a higher price, higher quality or even a product that will meet your needs. The ERP product must be examined more closely.

Understanding how ERP software solutions are priced will help you make the correct decision for your business. I believe the four key factors when determining the appropriate ERP price are:

1. The View
2. Market Size
3. Degree of Customization
4. IT Requirements

1. The View
This is the first and most important factor in determining the cost of ERP software. The more views the software supports, the more expensive the product and the larger the company the solution is designed to suit. Scalability is also an important consideration.

When you first log into many of the smaller ERP software solutions, you are presented with a view that might feature sales opportunities on the left and cash balances on the right. This is an example of a very wide view. While such a view is relevant for an owner or ERP operator, it is clearly inappropriate for everyone in a 100 person organization. The larger the solution, the more ways it can be segmented to meet the needs of the specific user logging in – at a higher price. As a result of this greater segmentation, large ERP systems are much more role- and process-based than smaller systems.

2. Market Size
The second most important factor is the size of the market for the solution. Solutions designed for a niche market will have higher prices because the potential customer base is smaller. The advantage of such a product is that it is – usually – designed to meet the specific requirements of that particular industry and should contain many of the necessary forms and processes. (A pest control solution might have a field for the type of pest and required protective gear, for example).

A note of caution: These niche ERP solutions are often very limited in critical areas including CRM, purchase orders, accounting, inventory, system admin, and so on. If you do decide to pursue an industry-specific ERP solution, it is extremely important that you also evaluate the presence and capabilities of these other functions. Frequently, the “industry-specific” section is only 10% of the software with the remaining 90% involving common business operations. With this in mind, it is often better – and less expensive – to find a more “general” solution that you can modify to meet your specific needs.

3. Degree of Customization
ERP solutions that cannot be customized should be substantially cheaper than more customizable solutions. Customization requires a team of highly skilled people well versed in both business and technical matters, not only during the initial implementation of the software but on an ongoing basis for support and continued development. While this flexibility is – in many cases – desirable, it comes at the cost of learning, configuration and ongoing support. In general, the greater the human component, the greater the cost of the ERP solution.

4. IT Requirements
This is the least important of the top four key factors when evaluating ERP solutions. While it is true that massively multi-user solutions capable of processing a million transactions a minute will be substantially more expensive than smaller solutions, the most important decision factors should involve those key ERP software facets discussed above that are essential to your company. That selection will in turn drive your technology; it can’t work the other way.

Part 2: Key Rules That Factor in ERP Costs

Understanding how these key factors affect price explains the cost of most ERP solutions.

• A solution designed to support a large number of users with very specific job functions in a niche or custom market is going to be very expensive. Most major corporations and government agencies belong to this group.

• A solution designed for a small number of users with a single, wide view will typically be inexpensive. This market is large and customization of these solutions is limited. The packages you can buy off-the-shelf at big box retailers belong to this category.

The above represent the two opposite ends of the spectrum, but you can apply these rules to your situation:

• As your company grows, so will your need to split up job functions into increasingly granular roles. When determining whether a solution is a good fit, calculate the number of different views you require now and in the near-term and compare that with the number of views supported by the software.

• The smaller your industry, the more difficult and expensive it will be to find ERP solutions that meet your industry’s requirements. Furthermore, you may find that while the solutions designed for your industry are good at the 10% that is unique to your industry, they offer poor performance with regards to the other 90% that is common among businesses as I discussed in the Market Size section above.

• The greater the need to meet your company’s and/or industry’s specific requirements, the greater the potential need for customization.

• The higher the volume of transactions and the more dispersed your workforce, the greater the cost.

Identifying solutions designed for your company’s current and foreseeable size, evaluating the importance of industry and/or company-specific workflow requirements, weighing the need for customization, and considering the IT aspects of deployment should allow you to quickly narrow the list of potential solutions from dozens to just a handful. It will also ensure that you avoid any major incompatibilities between your needs and your chosen solution. It is also more than likely that your short list will contain similarly priced ERP solutions that will illustrate your position in the pricing spectrum and a starting point for your budgeting requirements.

At the crux of innovation, you’ll find technology. Powerful tools have allowed us to communicate easier, work more efficiently, and solve problems that plague our professional and personal lives. Since the dawn of the internet age, software has shifted from an expensive luxury to an essential part of any enterprise.

Early on, many companies had to adopt separate solutions for each aspect of their business: purchasing, accounting, engineering, sales, and more. With so many siloed systems, enterprises struggled to see their businesses as a whole – which made it impossible to scale. Organizations quickly began looking for a way to integrate the various aspects of their business and allow their teams to operate from a holistic set of data. That's where ERP came in.

What is ERP?

Enterprise Resource Planning (ERP) software integrates, standardizes, and helps streamline business processes across a swath of departments. ERP software allows for the automation of certain focused business tasks, reducing manual labor and creating a shared database.

ERP solutions allow employees from separate departments, like accounting and engineering, to rely on the same set of data and pull any relevant information they need to do their jobs more effectively. This not only allows for easier collaboration, it also ensures that resources are used more efficiently and that the entire customer journey is more transparent to employees.

History: MRP Systems to ERP Systems

In the 1960s, the concept of ERP originated in the manufacturing industry. Product-based organizations used centralized computer systems to automate inventory. These were usually internally created systems and existed to track the amount of products made versus quota. With the goal of furthering software’s ability to optimize production and distribution, IBM partnered with a manufacturer of construction machinery: J.I Case.

IBM and J.I Case created Machine Requirements Planning (MRP) software. This software, simplistic by today’s standards, would require rooms of computers and processors that were used to leverage arithmetic to help manufacturers answer questions like: How much of a certain material should I order? The first iteration of the MRP, MRP I, focused primarily on inventory control. In the 1980s, MRP I was expanded on and evolved into the MRP II, which provided additional features including finances, general accounting, demand forecasting, and quality assurance.

It wasn’t until the 90s that Gartner coined the term Enterprise Resource Planning (ERP) to differentiate from MRP-only solutions. Gartner defined ERP as “an integrated suite of business applications.” The first ERP system was implemented in the 90s and expanded on the basic inventory control and manufacturing processes of previous iterations.

How Does an ERP System Work?

In order to understand how an ERP system works, you have to understand its main goal: to improve organizational efficiency by improving the use of a company’s resources.

ERP takes all of the functions essential to a growing business and integrates them into one complete system. More specifically, ERP takes data from various departments and assimilates it into a common database, enabling leaders to monitor the pulse of a company using a single vision of reality.

ERP systems have various modules, each addressing a specific business requirement. These modules are separated for ease-of-use, but they all push information into a central database. For example, companies focused on the efficient creation of products will have a module for accounting, inventory, order management, and customer relationship management (CRM).

Who Uses ERP?

Today’s versions of ERP systems can be used by companies across every industry; flexible and integrated systems can be customized to fit a wide variety of organizations and requirements. ERP software systems are very diverse and are essential parts of many industries, including but not limited to:

• Manufacturing
• Wholesale
• Healthcare
• Hospitality
• Waste Management
• Aerospace and Defense
• Automotive
• Construction and Home Improvement
• Food and Beverage
• Clothing, Consumer Goods, and Retail

Wrapping it Up

ERP software solutions allow for the better utilization of resources and project management that helps accurately report on an organization’s financial health and processes. The key to an ERP’s ability to increase organizational efficiency? A centralized database that acts as one source of truth for an enterprise. Although ERPs systems have their roots in the manufacturing industry, today almost any industry can benefit from an ERP system. To learn more about the benefits of ERP, check out some of our aACE Success Stories.

Did you think ERP was only for large companies? Learn how small and midsize businesses (SMBs) can benefit from this sophisticated approach to digitally structuring their operations.

What is ERP?

Simply put, Enterprise Resource Planning (ERP) is a type of software that has been developed to solve one of the most pressing problems for modern businesses: how to electronically integrate different operations across departments. For example, companies without a centralized business infrastructure may find themselves struggling to reconcile numbers from various departments: HR, accounting, inventory, order fulfillment, etc. Sometimes, each department may be running completely different suites of software that were never designed to work together, resulting in a markedly less efficient workload and more opportunities for errors.

The concept of ERP has been around since the early 90s, when a manufacturing company coined the term. The popularity of ERP products continued to rise as computers, networks, and the internet became invaluable parts of all modern businesses. Interestingly, Y2K (the widespread concern that massive computer outages would occur as binary-code based calendars switched from 12/31/99 to 1/1/00) may have spurred more businesses to adopt ERP software solutions as they looked to modernize and streamline operations before the new millennium arrived.

What Do ERP Software Products Cover?

While ERP was originally developed for manufacturing businesses, it is now widespread across both public- and private-sector organizations of all sizes in many different industries. Today, a typical ERP software package may include:

• Accounting. An ERP integrates the information of separate internal departments like sales, orders, and expenses so that all of the financial data is centralized. This saves time and eliminates having to reconcile accounts across each area. This reduces errors and allows your employees to focus on tasks that pertain to growing the business.
• Order Fulfillment. For companies that sell inventory, ERP software can be invaluable. An ERP coordinates every step of the process from receiving the order to shipping it. This includes keeping track of inventory and even initiating required steps like credit checks for potential customers.
• Data Tracking and Insights. An ERP generally includes a CRM (customer relationship management) tool. This information is integrated with sales, returns, and other important benchmarks to provide companies with real-time insights into trends and customer behaviors within the company. As the field of “big data” grows increasingly sophisticated, good ERP software will keep up with advances in the field and provide in-kind analysis. Additionally, most ERP programs also offer powerful reporting tools, which is great for government agencies or other organizations that may be required to provide reports to external entities.
• Increasing Manufacturing Efficiency. Because ERP has its roots in manufacturing, ERP software has the capability to standardize and automate manufacturing processes as well as supporting operations. This is great for companies that have experienced mergers or acquisitions because it allows for all processes to be standardized and centralized. This results in greater efficiency, financial savings, and reduced risk of error.
• Human Resources. Besides standardizing business operations, ERPs also include powerful workforce management tools. These allow companies to communicate with all employees and track time worked, time-off requests, and expenses from a centralized location. Some ERP software can even keep track of employee education and certifications so that people can be matched with appropriate projects.

The Benefits of ERP Software

Companies of all sizes will see benefits as soon as they have the ERP in place. One of the most noticeable improvements as operations are streamlined is increased internal efficiency; this plays out across every area that the ERP has integrated (which should be just about every internal part of business operations).

Companies using ERP systems also enjoyed increased agility and responsiveness to emerging technology⁠; since there is now one system instead of a patchwork of programs, companies can more easily change and evolve.

Along with increased agility, better security is also another benefit. With a single modern ERP system controlling operations, there is no longer a variety of login information and passwords secured with varying programs that each have their own security protocols. As ERPs start moving to cloud-based technology (more on that below), companies’ data will be even better protected.

Finally, with ERP software, companies may be able to enjoy better decision-making. This is because leaders have more information available at their fingertips due to shared data and the software’s analytics tools. Having a clear picture of what’s going on at every level can allow people from different departments to communicate more effectively, too.

Implementing ERP

With ERP being such a powerhouse of a tool, what prevents companies from implementing it? Namely, the complexity of doing so. Organizations that want to implement an ERP program first need to convince their leadership that an ERP is necessary, and then settle on an appropriate-tier solution that most closely matches the business’s size and needs ⁠— both of which can take time.

Next, because ERP programs interface with every aspect of the business’ operations, all existing information needs to be standardized and data needs to be cleaned up so it can be migrated to the new system. The timeline for doing this is easy to underestimate, which is why ERP implementation requires a strong project management team.

People inside the company may also be resistant to change or unwilling to do the work necessary to put the new system in place. Because ERPs can make some positions redundant, employees may even worry about job security.

With these barriers, it’s easy to see here how implementation can falter without a well-organized and effective executive sponsor who believes in the ERP product. Good planning, communication, and perseverance are all important parts of successful implementation.

What’s Next for ERP Software?

As cloud-based technology becomes industry-standard, many ERP solutions are beginning to offer solutions in this arena. Some companies have adapted their existing software, while others have written entirely new programs. There are essentially two options for companies that want to embrace cloud-based ERP solutions.

1. ERP as a cloud-based service. In general, most businesses should be fine with this option. The main drawback is that customers cannot create custom code, so those that need customized solutions will need to look at the second option. One of the main advantages of implementing a cloud-based ERP product is companies not having to host it on their own servers. In general, this option is more cost-effective and easier to upgrade.
2. ERP in an IaaS (infrastructure as a service) cloud. If a company needs a custom-coded ERP product, ERP as a service won’t work. To operate a customized ERP product in the cloud, companies will need to find a IaaS provider, which shifts their servers to a different location.

Although ERPs are complex, businesses that want to stay competitive can’t be intimidated. Finding the right ERP takes work, and implementing it can be a large and sometimes difficult project. This doesn’t mean that it’s not worth it to do so, even for small businesses. The increased efficiency and other benefits of putting an ERP in place may mean that your company finally has room to grow.

"aACE has provided a system and support that has really allowed us to do more than we expected to be able to in switching to a new software. It unified functions within our company that previously had little to no communication with each other." - Theodore Fotopulous, Operations Manager, Raydoor Inc.

It seems like every day there’s a new solution that will change the way you run your small business.

It’s hard to know which are legit, what partners you can trust, and what you need versus what would be nice to have. Not to mention what you can squeeze into your budget!

You already have enough on your plate running your business — and that’s exactly what you should be spending your time doing: running the actual business.

Enterprise Resource Planning (ERP) software can help. Let’s take a quick look at how.

What is Enterprise Resource Planning (ERP) Software?

An ERP is a software solution that collects information from all of your departments into a single, centralized database. Depending on what your business does, this may include critical business functions like finance, inventory, manufacturing, sales and marketing, order management, scheduling and more.

With an ERP in place, your team has access to real-time information that covers the entire scope of your small business. This data is available through your ERP's reporting and analytics, which will help your business make smarter, data-driven decisions.

An ERP solution provides enhanced visibility into your business operations and can help improve inefficiencies. You’ll also be able to highlight growth opportunities and use real data to get there.

When you have an ERP in place, your organization can use the program to keep track of your moving parts. All of your data will be in one safe, organized, accessible central database. You won’t ever lose anything to a spreadsheet again.

With an ERP, you have a complete picture of your business’s daily operations. It’s a transparent solution to manage your departments and work together to achieve your goals.

Benefits of ERPs for Small Businesses

We’ve already discussed the benefits of ERPs for businesses, but they’re a bit different when we’re talking specifically about small businesses.

Beyond providing complete visibility into your daily operations, your ERP will make your organization more efficient in these key ways:

Increase Productivity & Reduce Costs

The biggest benefit of an ERP is the ability to identify inefficiencies without having to hire additional IT or staff. The information you capture can help you learn about your business and gain a competitive edge. Using this data, you and your team can become more efficient and productive while reducing your operating costs.

It’s a smarter way to manage your small business.

Gain Agility

The small business environment is challenging and ever-changing. The success of your business depends on how well, and how fast, you are able to respond to that change.

When you have a flexible and scalable ERP, you will be knowledgeable about changing market dynamics. You’ll also have insights into your customer needs and be able to see a shift coming. You can then make decisions to respond to these changes and/or be ready for bigger movements. Staying agile means you’re ready and adaptable. These are the types of businesses that grow and survive.

Enhanced Analytics

ERPs are also incredibly powerful analytical tools. Since all of your information will be collected into one central database, you’ll be able to put that data to good use.

You can see where your business stands and use real data to determine what changes need to be made to meet your goals. You’ll be flexible and scalable and able to respond to shifting market demand. The ability to not just have a collection of data, but to understand and use its power helps your business stay a step ahead.

Become More Productive

Small business ERPs will automate tedious tasks that normally take up too much of your time. Things like manual data entry, inventory monitoring, creating reports, timesheets, invoicing, and more, can all be automated through your ERP. This frees up your team to work on more important tasks for your business.

Summary

Now that you see the value, the next step is to find the best ERP for your small business. With the right partner, your ERP software will keep costs down, improve the efficiency and productivity of your office, and help you scale and grow. Check out our free white paper to learn what kinds of questions you should be asking as you search for the right ERP for your SMB.