This blog post is part of an internal interview with our Sales Director Viviana Muñoz where we talked about those components that make up the cost of an ERP. Her experience in the world of ERP: ERP Consultant, with experience in implementation of manufacturing, construction, projects, rental and distribution projects. Commercial Manager of SAP partner in LATAM and Partner - Commercial Director of Vauxoo partner # 1 of Odoo.
 

How can I calculate the cost of an ERP solution?

For any company that seeks to implement an Enterprise Resource Planning System (ERP), price is one of the most important factors. However, little is said about what the cost is and what makes it up. To calculate the cost of an ERP solution, four components are taken into account:

1. Perpetual licensing or subscription
   

2. El servicio de implementación 

3. Infrastructure
   

4. Support
   

Licensing

The first component answers the questions:  What types of licensing are there? What advantages and disadvantages do they represent?

ERPs offer different types of licensing depending on the model, there are two models: perpetual licensing and subscription.
 

Perpetual licensing

Perpetual licenses are a right of use that the purchaser acquires to use the software in perpetuity. When acquiring this type of licensing, the buyer implicitly accepts an annual payment contract for the maintenance of the product, with percentages that range between 15 and 22% per year of the value paid for the licensing, this percentage varies depending on the ERP.
 

This is a model that is still preserved in solutions like SAP.
 

• What are the benefits of this model?
  

In some Latin American countries, since it is a fixed asset, it is possible to receive financing for its purchase and because it is a fixed asset, it may be depreciated and represents a higher cost value.

• What disadvantages does this model have?
  

It is not possible to reduce the acquired users, if your company bought 100 users and in the future reduced its employees to 50 users, it must continue to pay the maintenance contract for the 100 users in perpetuity. Companies that manage Points of Sales, agencies, and contracting by projects are the most affected by this rigid model (not scalable in users). 

It represents a high initial investment in licensing and can have a large impact on cash flow.
 

Aun cuando es un activo fijo, por tratarse de un derecho de uso, en caso de liquidación de la compañía, no podrá ser comercializado. 

Software as a service (SaaS)

In this model, the ERP software is accessible to customers through the internet through pay-per-use. The ERP vendor manages the hardware, middleware, application software, and security. SaaS model licensing works based on a subscription that can be monthly or yearly. In this model we can find solutions such as Oracle, Dynamics, and Odoo.

• What are the benefits of this model?
  

Normally these services are in shared cloud hosting, which represents a low maintenance cost.

They have solutions to deploy, scale and update the ERP more quickly.

Allows you to project the cost of the ERP with greater precision.

It does not require such a high investment, as the one made in the perpetual licensing.

• What disadvantages does this model have?
  

I believe that with the new reality, there are no longer any disadvantages on this model.

If we make a cash flow projected to five years, what could be the results depending on the types of ERP in licensing matters?

Showing a comparison of the licensing cost per user in the SaaS model of the solutions for medium companies of some ERP:

However, the licensing value per named user is not the only component of the licensing cost. There is a second factor that corresponds to the modules that users require access.

Odoo

In Odoo no additional user value is paid per module, but a fixed annual amount is paid for the module and it can be enabled in the acquired users, the values ​​of the modules are from 4 usd / month. When acquiring a subscription to a module, any contracted user may use the modules without any restriction or additional cost.

Dynamics 

The value included in (*** equivalent to 70 Usd does not include the production and service modules) if they need to be included, the value amounts to usd 100. If the user additionally requires access to CRM or sales module, they are required two different licenses.

SAP 

In SAP, two types of licensing are handled in the perpetual licensing mode, 1) professional license (you can choose between limited to finance, limited to logistics or limited to sales). In case it is required to enable user permissions for modules outside the scope of the license, an Upgrade to a professional license must be made, which would almost double the value. Take into account that additionally the payment of the maintenance of the licenses equivalent to 17% of the sum of the licenses is required.

Implementation service

The second component corresponds to the implementation service, this component answers the question:  What types of implementation exist?

This point is directly related to the implementation methodology suggested by each ERP manufacturer and the partner.

Currently, most world-class ERPs handle an implementation model through certified partners. These happen in the case of Oracle, Dynamics, SAP and Odoo.

Odoo

Odoo is a tool that uses agile methodologies for implementation. Vauxoo, as Odoo's number 1 partner, uses Scrumban as a development methodology.

It is an agile methodology based on Scrum, which adopts various Kanban and LEAN concepts to ease the framework and dedicate more time to high-value activities.

Scrumban does not have rigid work cycles, but rather they are flexible, triggering “sprint meetings” and the start of the next cycle based on certain conditions.

The project begins with a single planning phase that will last approximately 1 month, followed by iterations or phases consisting of 3 stages each as shown in the following graph.

SAP

While on the other hand SAP uses an ASAP (Accelerated SAP) methodology for implementation:
 

1. Project preparation: definition of objectives, selection of human resources, definition of roles and responsibilities, etc.
   

2. Blueprint: a documentation process is carried out, the design of the solution is elaborated at a technical and functional level.
   

3. Realization: the basic adjustments are elaborated to carry out customizations of the software to the business processes, they are validated, data migration, reports.
   

4. Final preparation: in this phase, unit and comprehensive tests are carried out and the integration of the software with the processes is tested. End users are trained.
   

5. Go-live support: the necessary support is provided to the personnel during the start-up phase of the system, especially in the first days, although the support phase can be delayed in time because it is necessary to stabilize all the modules at the same time.
   

Both deployment models typically have recurring fees for ongoing training, support, and maintenance. The rates depend on the countries. In LATAM, rates between 50 usd and 90 usd per hour are common, and a standard distribution project, or sale of services of less than 50 users could be implemented between 400 and 700 hours depending on the methodology used.

The difference lies in the fact that the agile implementation methodologies used in the Odoo ERP will allow obtaining quick victories and therefore a rapid return on investment, additionally they have the benefit that investments are usually in phases.

In more rigid methodologies, which do not allow modular implementation, a high investment is normally required from the beginning and the results can be seen until the entire ERP is implemented.

Infrastructure

The third component is the infrastructure, this answers the question: What infrastructure model am I going to use?

• Purchase of the infrastructure
  

  In this model, the client buys the servers and hosts them in a datacenter service (housing) or in their facilities.
  

• Hosting
  

  In this model, a service provider such as OVH, Google, Azure, or a company that offers servers in the cloud is used to install and maintain the software. Typically, requires deployment tools.
  

• SaaS Model
  

  In the case of SaaS solutions, the software is hosted on the ERP provider's internal servers, therefore the client is not responsible for maintaining the infrastructure.
  

Support

Once the ERP is in production, and has been stabilized, implementer support services are usually required.

There are basically three types of support payment depending on the ERP and the implementer, 1) Recurring support contract with a fixed value and scope, 2) support packages for hours or tickets and 3) Postpaid support.

In software licenses

The cost of a user accessing an additional module (not included in the contract) represents the most typical hidden cost and in many cases, it is not a minor case. We recommend in the presale, consult with your advisor the impact that a user may require access to additional modules.

In deployments

Two of the most recurring hidden costs are:

The ignorance of the terms and conditions of the so-called “turnkey projects”, in which a project scope is sold, and the client does not keep track of the hours invested. It is clear that the consulting company must protect the scope of the project to obtain profitability, so it is necessary to read in detail the fine print of the terms under which it is a closed project, for example. Up to 5 approvals, up to 3 reports, up to 10 custom fields, does not include developments, etc. It is necessary to request your presale, to notify you of the scope and limitations so that they are documented.

In projects that are quoted per consulting hour, not having an expert partner could underestimate the implementation hours and not correctly estimate developments or customizations. This could make the client budget for a scope and finally, due to the inexperience of the consultant, end up paying a different value.

In infrastructure

When it is not about hosting, but installation on the client's computers, several ERPs use Windows servers to be installed and require this type of licensing or licensing of tools such as terminal server for remote access.

That is a hidden cost, since many times companies do not see it until the implementation begins, and they are not within the ERP quote because that is not part of the product.

Not being clear about how much the next phases will cost and if the selected ERP has the necessary tools to implement it

It is clear that in the first phase, companies seek to solve the internal operation, the core business or as it is known "organize the house", however, in this new reality, companies need flexible, versatile and future-oriented solutions that allow to cover the operation of the company and also provide tools integrated into the ERP and that help both to automate the operation and to improve the customer experience.

When an ERP does not have these tools, companies will have problems in the future, since they will not be able to better face current challenges (Remote work schemes, business digitization, Marketing 5.0, among others). At this time, unfortunately, companies will be forced to incur in developments or to contract integrations with other software to meet these needs, generating an overflow of project costs and times.

Not acquiring an ERP that have a solution for different industry verticals

Companies are constantly changing, so they require solutions that offer different industry verticals, to guarantee the scalability of the system to new business models.

Selection of a software that does not allow decreasing

Selecting a software that does not allow them to decrease in modules or licenses is a direct impact on the company's cash flow. Normally, companies aim to grow and increase their client portfolio, but sometimes due to different factors, clients can decrease and companies must continue to pay annuities for having acquired perpetual licensing models with maintenance annuities and clauses that do not allow them to decrease in number of user licenses.

The search for an ERP that generates value takes time, knowing the components that make up its cost generates a clearer idea for choosing the ERP that best suits the needs of your company. A clear focus on the characteristics that will be required in the short, medium and long term for the correct choice of an ERP must be ensured.

* Odoo. Value per user named year for SaaS projects, for standard implementations. Includes manufacturer hosting. It does not include the value of the modules because it is not charged per user.

**Dynamics.  Named user value year usd 70 month for standard implementation (does not include Manufacturing modules or services), includes hosting. 

*** Value per named user per year with limited license (logistics, financial or sales). The value varies for professional licenses. SAP as a manufacturer does not offer direct hosting, it is required to contract a hosting service with a third party, or multi tenancy servers with the Partner. Included in the value presented