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Telling the whole ERP TCO story

A new Ovum study shows that licensing fees account for only about 10% of ERP implementations, and analyst Dennis Keeling suggest ways to determine real TCO.

License fees alone are a poor indicator of the cost of ERP systems, and international companies should consider...

a two-tiered approach when deciding implementation strategies, according to an Ovum report that examined 40 global businesses.

License fees can represent as little as 10% of the cost of an ERP implementation, according to the author of the report, UK-based analyst Dennis Keeling.

The result, Keeling said, is that TCO costs aren't dropping just because large vendors such as SAP, PeopleSoft and Oracle are more likely these days to negotiate discounts in licensing fees.

"Where license fees have been dropped by as much as 50%, implementation costs remained pretty much the same," Keeling said.

Keeling, who founded the UK-based international standards body, Business Application Software Developers Association, (BASDA), issued a report on the cost of implementing business solutions for the European-based global consulting firm Ovum. He presented his findings at the first SearchSAP.com European conference, held in London in April, and attended by 200 SAP decision makers.

Keeling encouraged his audience to consider an unconventional, two-tiered approach, which combines Tier 1 enterprise-wide software vendors such as J.D. Edwards, PeopleSoft and SAP with Tier 2 products from companies such as Microsoft (who entered this space with last year's acquisition of the Danish ERP firm Navision) and SunSystems.

Why? For one, Keeling said, the complexity of Tier 1 applications isn't typically a good fit for smaller subsidiaries and branch offices, and Tier 2 vendors can provide more scalability in terms of concurrent users.

For global companies, Keeling said, "Many localized, Tier 2 solutions are easier to implement, in some countries, than configuring a centralized Tier 1 solution." Keeling highlighted the availability of technical structures in developing nations as another reason to implement tier 2 products in satellite locations.

Crucial to keeping ERP implementation costs down is the capability to standardize a company-wide implementation template, customizing only at local levels.

"Keep it vanilla," said Keeling, referring to standard business processes supplied by software vendors. Inventing fancy flavors and customized processes leads to high costs and trouble, he said.

When determining TCO, Keeling said companies must consider initial costs -- capital costs of equipment such as servers and workstations; initial software license fees based on number of application modules and users; and, of course, implementation costs. Those include external consulting fees; configuration and customization; training and staff costs.

The next phase is where many IT managers misstep, Keeling said. Real TCO numbers rely on understanding ongoing, running costs, he said.

Those include hardware maintenance; application maintenance and support charges; cost of upgrades, including consultants; infrastructure maintenance; management time; and depreciation of initial capital costs.

Things to consider when looking to cut implementation costs include whether to use a template implementation (Keeling's suggestion) or separate implementations by third parties. Companies should also plan implementations around decentralized, stand-alone strategies rather than implementing enterprise-wide systems. When choosing a partner, Keeling encouraged clients to stick to their software vendor (though other SearchSAP.com keynote speakers suggested otherwise).

"It's in their interest to minimize charges," Keeling said, "especially in this competitive environment."

More on this topic:

>> Find more resources on TCO/ROI decision criteria on SearchSAP.com

>> Past editions of the ROI Insider

>> Submit a question to our ROI expert


This was last published in June 2003

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