It is generally accepted that a bicycle has a lower total cost of ownership (TCO) than a station wagon. In most cases, however, station wagons yield more benefits over time for getting the kids to the soccer game, hauling groceries, etc.
In point of fact, you would never do a TCO analysis to make the bicycle vs. car decision for your family’s transport needs. The same approach should drive the selection of ERP (enterprise resource planning) and other business application software. To put it bluntly, TCO is irrelevant without analyzing benefits as well.
I don’t mean to imply that some ERP solutions are bicycles while others are station wagons, but the economic concepts are identical. At the end of the day, what matters is the amount of value derived (read benefits) per dollar of investment (read TCO). So, as the title of this posting states, “it ain’t just TCO,” as it relates to selecting and implementing ERP software. What matters, of course, is what you get (and when you get it) for the money you invested. There are many situations where a customer would be better off implementing an ERP solution with a smaller benefit stream. Again, it all depends on what it cost you to earn those benefits. Does this make it easy to do the analysis? Unfortunately not. But, if we focus on benefits derived per dollar invested, we can begin to bring the analysis under control. For the rest of this blog , I want to set the stage by focusing on some of the variables that drive the analysis.
Cost
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Software: Both license fees and maintenance. If you require other software to make ERP work (e.g., middleware, business intelligence), it should be included here.
- Hardware: Servers, networks, desktops, etc. Many companies minimize cost here when they ride on top of a “free” corporate network. Costs should be allocated proportionally.
- Professional services: This is generally the largest cost, and the quality of the consulting firm (and how they are managed by the customer) can make or break a project. If there are significant reengineering costs before ERP selection begins, don’t include them in the cost analysis.
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Internal staff: For project implementation, internal staff costs tend to be about 50 percent of professional services costs.
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Post-implementation costs: Some number of full time staff will be required to both maintain the software as well as support business users. These costs are often overlooked in the analysis.
Time
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Time to go live: Actually, only of modest interest. Of course, we can’t achieve benefits until we go live.
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Time to benefit: For those keeping score, this one really matters. To compute any type of financial return, we need to know when good things start to happen, by benefit.
Benefits
This area is enormously complicated and most companies ignore it, or spend too little time on the analysis up front. For now, let’s highlight the major areas:
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Savings in time, full time equivalents: Savings in time translates to real dollars ONLY if a). Positions are eliminated, or b). The staff is redeployed to other money- making activities. Systems that save employees 15 minutes/week are only good for the employee.
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Savings in IT costs: Quite possible, if a number of legacy systems are retired, freeing up both license and maintenance costs.
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Operational savings: These are the best results to have, and could include things like more inventory turns, faster time to product development, ability to sell to more customers, etc.
Bottom Line: Make sure that the ERP vendors help you understand “benefits achieved per dollar invested.” The more examples the better. Stick to simple breakeven or ROI calculations, going out no more than three years from when the last benefit is attained.
