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Small Business ERP Total Cost of Ownership: Looking Beyond Upfront and First Year Costs

Tuesday, January 19th, 2010 by Alex Smith

One of the most significant hurdles a small business faces in deciding whether or not to migrate to an ERP system is project cost. Generally speaking, the total cost of ERP implementation can be divided into three main categories, including software licensing fees, implementation and training fees, and annual maintenance fees. This third category, annual maintenance, is often overlooked in the software evaluation process. It is imperative that the small business’s selection team consider not only the software vendor’s maintenance fee during implementation but the software vendor’s maintenance fees for the years following implementation (and what is included with such maintenance fees) in order to calculate an estimated five-year total cost of ownership. This five-year total cost of ownership calculation will give the selection team a better view of what the business’s projected cash requirements will be for implementation as well as the years following implementation to determine the most cost-effective long term solution for the organization.

Many software vendors begin to charge their new customers annual maintenance fees the day contracts are signed. At TGI, we believe charging new customers maintenance fees during ERP implementation is inappropriate. Given that a small business ERP implementation may take anywhere between three and six months, we do not believe a business should have to pay maintenance fees on Enterprise 21 when the software is not yet being used in a live transaction environment – annual maintenance for Enterprise 21 is free for one year from the date of software installation, allowing for a more cost-effective first year of ERP ownership.

Secondly, the business’s selection team should consider each software vendor’s maintenance fees for each year following ERP implementation. Do the software vendor’s fees increase after the first year? Do the vendor’s maintenance fees increase each and every year over time? In addition, two great questions to ask ERP vendors are, “What is your annual maintenance fee today? What was your annual maintenance fee five years ago?” While these two questions may seem inconsequential at first, they are crucial to determining the most cost-effective long term ERP solution for the business. The business does not want to be faced with a situation in which its maintenance fees have doubled in the first three years following ERP implementation. When a given vendor’s new software sales start to slump in times of economic downturn, the easiest way for the vendor to make up for its loss in revenue is to increase its maintenance fees for its existing customers; therefore, it is crucial that the selection team search for an ERP vendor with a track record of consistent, non-escalating maintenance fees over time. At TGI, we are proud to say that we have never increased our annual maintenance fees since the company was founded in 1990.

By analyzing ERP vendors’ total long term solution cost, not just the cost to be incurred during the first year of ERP ownership, the small business will have a more accurate view of its budgetary requirements for the years following implementation and be in a position to determine the most cost-effective long term ERP software solution.