The time has come to reflect on some ground we have covered in this blog, add a few items, and see where this takes us:
The Value of Value: Yes, we talked a lot about value in this blog. While we are very tied up with the notion of total cost of ownership (TCO), at the end of the day, a successful ERP project returns more to the corporation than the cost of building and maintaining that application. But, value is indeed hard to target and measure, and we provided some guidance on how to do that.
Bottom Line: Work hard to establish quantifiable benefits.
The No Pain No Gain Refrain: In this blog, we traced a logical path from corporate pains to quantifiable benefits. Indeed, as part of this path, we examined the power of key performance indicators (KPIs). KPIs should become part of a data warehouse, and provide a continuous framework for overall corporate improvements. If you are not hitting your KPI targets, you must determine why, and take corrective actions.
Bottom Line: Create a closed loop decision-support system to measure and manage by KPIs.
The Absolute Truth About Relative Cost: This is new. While we spend a great deal of time talking about value, cost matters and must be contained. Runaway ERP projects can easily dwarf value.
While I was an (objective) analyst at META Group, we performed a number of studies on ERP value, cost and time to benefit. It was quickly apparent that the TCO for a company was highly dependent on the company’s size (I know, a blinding case of the obvious, you will say). Nonetheless, on the quest, we invented a new term, called Relative TCO:
Relative TCO = TCO/(1 Year of Corporate Revenue).
As an example, a company that averaged $1B in revenue/year, and had a TCO of $10M to go-live, would have a relative TCO of 1 percent. Now, it turned out that larger companies (revenue > $200M) often hit this 1 percent mark. Of course, there was tremendous variability due to the number of interfaces, number of countries, etc.
Smaller companies tended to hit 2-3 percent. Why was that? As we analyzed the data, we realized that a) there was an underlying cost for just playing the ERP game (foundation costs), and b) with fewer staff, these companies needed to buy more professional services. So 3 percent was not a “bad” result, just a fact of ERP life for smaller companies.
Bottom Line: ERP costs are relative, and any analysis of ERP costs without examining peer groups or company size is essentially flawed.
The Real Cost of ERP: In this blog, we examined post-implementation costs, both IT costs and business costs. We determined that a reasonable number was for annual post-implementation costs to average about 20 percent of TCO/year – or about 0.2 percent of revenue (if you do the math).
Bottom Line: Post-implementation costs are relative too, and very important.
How to Avoid a Giant ERP Software Headache: In this blog, we considered another hidden post-implementation cost. We were originally focused on the cost of the teams who supported the users who ran the business with ERP. But, as it turns out, this is another area to analyze. If it takes more users to do the same amount of work (or deliver the same value), there is a problem.
Bottom Line: Measure the efficiency of your ERP users.
Upgrades: This is an area we should cover to be complete about ERP costs. Most vendors go through a major upgrade cycle every four years or so, and the upgrade costs should be measured relative to TCO (or corporate revenue). It is not unusual for a major upgrade to be 50-70 percent of TCO, and companies looking to buy ERP software should collect data from the ERP company, analyst firms and peer companies.
Bottom Line: Upgrades are important, but, here too, the cost is “relative.”
